Be in the Business

I am just finishing up the new Ben Graham biography, The Einstein of Money, and I have to say it is a pretty good read.  One point that the author really brings home is Graham’s belief, later adopted by Warren Buffett and other successful value investors, is that we should look at a stock as if we are buying the entire company. All too often today stocks are viewed as just an electronic bet on the popularity of a particular company, sector or overall market. The average holding period for many investors is a period of days or even hours and such pure speculation is a difficult enterprise for individual investors computing against Doctors of Physics and Statistics armed with super computers.

I view my portfolio as a conglomerate of companies not a collection of bets.  When I find a cheap stock I ask several questions. Why is it cheap? Do the credit scores indicate a high likelihood of survival? What needs to happen for conditions to improve? And last, is this a business I want to be in for the long term? Adding this qualifier often keeps me out of value traps and companies with no real recovery hopes. A list to statistically cheap stocks usually includes small biotech’s trading for less than cash but no viable product and third tier semiconductor companies with no niche and decaying margins.  It also helps me cast a cynical eye towards potential buggy whip industries like brick and mortar computer stores and one hit wonder retailers on the way out.

Everything starts with valuation for me. Before a stock ends up in my portfolio it has to be safe and cheap before I will buy no matter how much I love the underlying business. I love everything about Amazon (AMZN) but will never pay a triple digit earnings multiple for a stock. Most of the time I look for company valuation first, and then consider the underlying business and industry. As with every rule there are exceptions to that rule.

There are some businesses I want to be in for the long run. I keep lists of companies in that business on my desk with the valuation calculations for each one. I compare my lists to the stock prices on a regular basis and look for an entry point into the stocks on a safe and cheap basis. I watch Mr. Market’s mood regarding these companies very closely hoping he will enter a temporary depressive sate and allow me an entry point.

One such industry is the community and regional banks.  The short term headwinds facing the industry are substantial as we all know. The higher cost of regulation and compliance combined with a seemingly permanent low net interest margin makes community banking a tough business right now. However those banks that have solid balance sheets, low loan losses and excess capital will be in the proverbial catbirds seat over the next decade. They can grow at the expense of weaker competitors; take market share from larger banks or just stay as they are and grow book value and dividend payouts. They can also just simply exit the business via a sale of their bank. Given their strong condition and local presence in their market they should be able to do so at a sizable premium to book value in a few years. I keep a list of these banks on my desktop and when they trade at 80% of tangible book, I buy the stock.

I also keep a list of infrastructure stocks on my desk. In spite of the current fiscal and political conditions in the US and around the globe I do not think the world will end. I think it will be difficult and as we have seen take longer than anticipated to get on back on track but we will eventually. When we do there will be enormous pent up demand for infrastructure projects. In the US we need an upgrade of our highways roads and bridges. The water supply and disposal systems of many of our major urban areas are practically antiques and need substantial repair and replacement work.  The electrical grid needs to be completely reworked to not only provide better service but improve our national security. Keeping a list of companies close helped me jump into stock like Granite Construction (GVA) and Mueller Water (MWA) in last year’s late summer sell off. At some point these stocks will be a boom sector with rapid profit and stock price growth and I want to buy them when the hit my price levels.

I base all my decisions first and for most on valuation but there are some businesses I want to be in and watch closely for the value to appear.Recently, amidst the flurry of pennant baseball, I spent some time thinking about other businesses and industries I might want to be in for the long term. I do not invest based solely on trends and expectations but I do keep lists of stocks that I think will benefit from social, demographic and economic trends over the next decade. If and when they fit the definition of safe and cheap I will gleefully buy them as I get a chance to double dip on value and anticipated growth opportunities. It is clear to me after some deep thought that the ravens will make another playoff run and I want to be in the energy business for a long time.

I know that many think that the alternative and green energy technologies are the place to be and I agree with them to a degree. However the time and place to be in that business is still a long way away as the technology is still not far enough along to provide the majority of our energy needs. At some point in the future I can see solar, biofuels, wind and other technologies providing most of our daily needs but I think that will happen in my son’s lifetime not mine. For now and the next two decades I want to be in the messy, dirty, grimy energy business, the one that digs up oil, gas and coal to meet the energy demands of the nation. Lower cost energy form domestic sources can go a long way to boosting out economy and at some point our energy policy will reflect that fact.

I want to own stock in a company like Tesco Corporation (TESO) for a long time. The company provides drilling technologies and services including top drives and tubular services. They sold their casing segment to Schlumberger (SLB)in April for $45 million in cash. The company pretty much invented the top drive rental market and continues to dominate that space today. Management has repeatedly stated that they are aiming at becoming the number one provider of top drive by 2015. They are also committed to further international expansion particularly in the tubular services division. It is also reasonable to assume that as Schlumberger continues to roll out case drilling units that Tesco will pick up incremental tubular products business as a result of their familiarity with the new technology.

The company has enormous growth potential but the stock is cheap at the current time. Tesco shares trade right at tangible book value with no long term debt and a current ratio of almost 3. The company has a Z score of over 4 and an F score of 6 so the company passes the standard metric for credit and potential. Viewing this though my going concern lenses, the stock trades at an EV/EBITDA ratio of less than 4 and at about 60% of my intrinsic value calculation. If energy demand were to pick up in the future a takeover announcement by a larger competitor would be less than a surprise to me.

The stock has fallen as a result of missing earnings and revenue expectation and is trading near the 52 week lows. I think you can either begin buying the stock outright at the current price or consider trying to sell the December $10 puts between the bid and the ask of $.70 to $.90. If you do decide to sell the puts use day orders only and check you option pricing daily until filled.

When I look to over the next decade it is clear to me that a recovering global economy will eventually drive energy demand growth. We are going to need to dig and drill to meet that need at a cost effective efficient basis. I want to be in the digging and drilling business by owning companies like Tesco that provide the tools and those that use the tools like EXCO Resources (XCO) and Nabors (NBR).Economic perceptions and oil market realities will provide some steep selloffs that create multiple chance to own the oil and gas business on a safe and cheap basis and I want to be ready to take advantage fo every opportunity Mr. Market creates.

Before we move on form the idea of being in the business you own I want to talk about some of the companies I have my eye on right now. I own a little of these in some accounts but am waiting for a pullback that gives me a chance to get loaded up on these names. The stocks are safe and cheap and their long term business prospects are just flat out exciting. These companies are out of favor at the moment but it looks to me like they have what it takes to be global growth leaders over the next decade. These are stocks I expect to be selling to momentum guys at many multiples of the current stock price at some point in the future.

I have a rule against falling in love with stocks but it is very hard not to break that rule when it comes to shares of Corning (GLW). This company’s products are used in what should be some of the most exciting markets over the next decade. The company provides glass for flat screen TV’s computer monitors and handheld devices including smartphones. That’s a huge market in and of itself that will substantial growth when the economy recovers over the next few years.  However this is only 35% of the total company.

Corning also manufactures optical Fiber and cable to the global telecommunications industry. Even in a weak economy the worlds demand for greater band width is insatiable and Corning provides the products that expand bandwidth.  Why take a chance buying Chinese stocks when you can own Corning and benefit from the demand for higher bandwidth and greater broadband penetration in the world’s largest country? It is no secret that I am not a tech guy but even I can understand the demand for broadband and increased bandwidth will be with us for quite some time to come. As a global leader in the space Corning will get its share of that growth.

The Environmental division makes glass for filters such as catalytic converters. Regulations in Europe japan and the United Sates make these types of filters mandatory for all newly manufactured autos and trucks. They also make ceramic supports that are used to scrub air form refineries, power plants, chemical plants and other pollution emitting fixed locations. Again increasing pollution control regulations throughout the globe will help drive sales and earnings growth for this division of the company.

8% of revenues come from products made for the life sciences industry. Corning glass products are used for a wide range of devices and tools used in biotechnology research and the production of bio products. Although a small division of the company the growth potential is obvious as more research is done every day for biotech answers to health and even energy problems around the globe.

Every segment of Corning’s business has exciting growth prospects over the next decade but the stock has been weak because they missed estimates and had a few soft quarters where business was below expectations. As a result of Wall Street’s short term attitude and forecasting difficulties the stock is cheap. Right now Corning shares trade at about 90% of tangible book value even after a recent bounce. The company has a total of more than $6 billion in cash and after subtracting debt they still have more than $3 billion of net cash. They are using the cash to buy back stock and also recently hiked the dividend by 20%.  The company should be able to increase free cash flow and earnings rapidly as the economy recovers and consumer demand for its glass products increases. A stronger global economy will also focus more attention on environmental concerns and that will help that division grow sales and profits.

The stock is safe and cheap and the company has almost unlimited growth prospects across its major business lines. I think you can buy a little here and scale in on market declines. This also a great candidate for backing into along position by selling the puts on cash secured basis. I would look at the January $12.50 contract to potentially create a long position below the current market price. Please not that although I like everything about this company and the stock price I am still going to stay small and move slower and scale into the stock allowing Mr. Markets mood swings to get me a better average cost.

Originally published as a Real Money series of articles.

Buying on the Cheap

The business that I think is the most interesting and exciting over the next decade is the real estate business. We have seen prices collapse over the past four years as the credit crisis unfolded. Sales have shown some signs of picking up but are still well below the historical norm. Commercial Real Estate is still suffering from high occupancy rates and many have stayed foreclosure only by perfecting the game of extend and pretend. The brokers and agents I talk to around the country tell me that outside of major markets like New York, Boston and Washington DC it is much harder to make a living. The number of agents and brokers has declined over the past four years simply because it is a much tougher way to make a living than it was in the boom.

When an industry falls apart the way real estate has the most important question you have to ask is if the business is necessary and will come back when the cycle changes. In the case of buggy whip manufacturers or beta max video cassettes the answer was no, the business was no longer necessary and would not experience another positive cycle.  When the oil industry sold off in the 90s as oil went below $20 the answer was that the industry was necessary and would see an eventual turn upwards. A lot of money was made by long term investors who got into the oil business when the conditions were poor and the outlook muted. I think this is the case for the real estate business today.

Over the past several years I have been aggressively a buyer of real estate related securities with mixed results. Some like management and investment company WP Carey (WPC) have done very well. Others like Commonwealth REIT (CWH) have not done as well in the shorter term. In my personal and client accounts we own hotels, retail malls and office buildings though REITs like Sunstone (SHO), Ashford Hospitality (AHT), Kite Realty (KRG) and others. We have exposure to the brokerage and consulting business through our stake in BGC Partners (BGCP). We also have exposure to both CRE financing and residential mortgages through stakes in Northstar (NRF) and Invesco Mortgage (IVR). I love everything about the industry and have been able to get invested when the issues were safe and cheap. Unless the world truly ends I expect to do extremely well with these positions.

When I was running my cheap stock screens this week I noticed another name I will be adding to portfolios. Brookfield Office Properties (BPO) currently sells at just 80% of tangible book value. I think this is an attractive entry point for a collection of premier properties in some of the world’s best markets. They have 122 properties totaling over 80 million square feet of office space including some of the worlds best known buildings. In New York alone they have more than 19 million square feet and almost 8 million in the strong Washington DC marketplace.

Because of their prominent position in key markets they have a 93% occupancy rate and their average tenant has an A credit ratings. If not for the semi distressed LA Market the occupancy rate would be much higher. Even in that market it is worth noting that the company as a 15% vacancy rate while the average building is 20%. The average lease still has more than 7 years until expiration so much of their cash flow is locked in for a substantial period of time. The leases that are rolling over in the next few years are priced about 20% below current rates so there is some upside potential for revenues via rent increases. In 2013 they have more than 3 million square feet of space expiring in the World financial center in Manhattan. Although many view this as a significant challenge I think it may well turn out to be an upgrade in cash flow for the company. They have had no problem leasing space in other New York properties and I think that 3 million square feet will lease up quicker than many expect.

This is a world class collection of office properties available for less than the tangible book value of the underlying real estate. The dividend yield is a little lower than I like in a REIT and just 3.6% but if world does not end the dividend will gown and the value of these properties should take the shares much high rover the next decade. At the current price I think it is safe and cheap. Investors who like the real estate business should start scaling into the stock.

Pigs and Dividends

I made a remark the other day on twitter that has drawn a few comments from friends and associates during our never ending discussion of all things market and baseball. I said that the amount of intellect and energy spent on guessing the short term fluctuations in the value of corporation was staggering. Given that many, if not most, of those trying to game the underlying corporate value on a daily basis fail to beat the market itself it would seem to me that much of it is wasted. Some of my more active friends took umbrage to my remarks and insisted that my approach is not practical or realistic. Waiting for the markets to fall before becoming an aggressive buyer is foolish they scolded me and causes one to miss the big moves.

Clearly I disagree. Since I first read the story of Mr. Womack the pig farmer as a new broker back in the 1980s buying big down moves in the market just makes sense to me.  For those of you not familiar with my pig farmer friend he was introduced by John Train in an article in 1978. Mr. Womack would come into town when the markets were in a free fall and buy several profitable dividend paying companies that had fallen below $10 a share. He would hold them for a few years and when the news was all sunshine and candy he would sell his stocks for very large gains. He treated stocks like pigs and bought them when the market was weak and sold them during BBQ season. As a bonus Mr. Womack was quick to point out that pigs don’t pay dividends.

History is on my side of the argument as well. At least once a year we get a stock market decline of between 10 and 15% from the highs. Every couple of year we get one between 15 and 20% and around every three years or so we get one of those gut ripping bear markets that drag prices down more than 20% peak to valley. If you wait for prices to drop to the 10% level to really ramp up your buying activity and scale in as the market continues to fall you will be able to buy stocks far cheaper than the buy everyday crowd. If you plan to own them for a period of years, as I do, paying a lower price as a result of a market decline almost has to lead to higher returns.

I do not want to make this sound too easy. Look at the period from April to June of this year. The market fell roughly 10%, a regular occurrence if you are a student of market history. Yet if you were listening to the financial press or reading the papers it seemed that the world was going to end. In 2011 we saw a steeper selloff from August into October of roughly 19% and the doom and gloom was so thick you could cut it with a knife. Even if you started buying with the market down 10% and scaled in you have done much better than the market since that time. If you just added at every 5% additional decline you would have been in the market at a cost of 1160 on the S$P 500 and sitting on an 18% gain as of today. That’s better than almost all mutual funds over the past year and even bests the average hedge fund by a wide margin. That is accomplished by just buying the market itself without applying any valuation principles.

The real hard part comes from the simple fact that you will never catch the dead bottom of a market. If you do it was a fortunate accident. Consider the meltdown of 2008 to 2009. The ultimate drawdown was greater than 50%.  If you focus on safe and cheap stocks and believe that the world is not going to end the additional adverse excursion is just a chance to scale into sound investments at better prices.

An enormous amount of activity goes into try to trade and time the market on a daily basis. If you look at the overall returns of the hedge funds and mutual funds that engage in such activity most of them are not outperforming the buy despair and sell optimism distressed and value types like  Wilbur Ross and Howard Marks.  In my experience there are very few great traders and not many that good ones. The good ones all have extraordinary math skills and huge computing power that most of us cannot match. I cannot go head to head with James Simons and his specially cooled computer room. I can buy stocks with solid balance sheets below the realizable asset value when everyone is panicking and sell when Mr. Market cheers up.  History tells me that will fare better than most of the frenetic trading I see every day. 

Little Banks, Big Profits

Earlier this week I was lounging around Chez Melvin, contemplating the Orioles playoff chances, reading some brain candy novel and generally minding my own business. This was of course the moment that the Voo-Doo professor chose to share his latest project and sent me a spreadsheet of small bank with less than a billion in assets.  Dr. McNabb  is apparently looking at the same set of facts I used to establish my trade of the decade thesis. Increased compliance costs are going to make it difficult for these banks going forward so they are going to have to seek a merger partner in the very near future. When I spoke with him this morning he said, “With the writers of Dodd Frank favoring the same industry leaders that required a bailout, the small banks will become targets as they will find it easier to sell out than comply with the weight of regulatory excess and loss of business discretion and judgment to pursue opportunities in the marketplace.”

I also spoke to the good folks at FJ Capital the other day on this very subject. The firm runs a community bank stock focused hedge fund and views the market the same way. Managing Director Scoot Cottrell told me, “For many shareholders of community banks with a billion in assets and under, they will likely get better returns on their money from a sale of the bank.  In many cases, the returns that these banks post on equity will be single digits or worse – for a lot of investors, this is insufficient for the risk they take as equity investors.  Returns are going to be lower because many banks are being squeezed from all angles:  higher regulatory costs and higher capital requirements, compressed net interest margins, slow loan growth, still elevated credit costs and regulatory opposition to higher fee income.  While there is definitely a group of smaller banks that will be able to re-invent themselves or survive due to lack of competition or a unique business niche, many smaller banks will be faced with the choice of delivering high returns to shareholders through a sale or paltry-to-dismal returns to shareholders by remaining independent.”

There is another solid reason to focus on the smaller banks. Earlier this week many of the same concerns led the board of Hudson City Bancorp (HCBK) to approve a takeover by M&T Bank (MTB) at a price below tangible book value. The deal should work out in the long run as it is a good fit for both banks. However as a shareholder I made pennies where I should have made dollars. The directors and officers, as well as members of the local community, of the smaller banks tend to have a significant portion of their net worth invested in their bank and are less liley to accept a take under offer. The small deals should be done at a multiple of tangible book value and not a fraction.

In comparing the Professors list of little banks and mine of safe and cheap banks I find a lot of shared names. One of the more intriguing is Berkshire Bancorp (BERK). The 11 branch bank has 11 branches in the New York Metropolitan area and about &880 million of assets. Insiders own 80% of the outstanding shares so no deal that doesn’t fit their objectives will ever get done. The bank is incredibly healthy with equity to assets ratio north of 14 and a nonperforming assets ratio of just .06%, one of the lowest I have seen since the banking crisis began. There will be interesting acquiring the bank but insiders will want a premium price. They are very well run so they may be one of those smaller institutions able to simply grow their way into dealing with higher costs and increased regulations. Either way with the stock trading at just 88% of tangible book value the shareholder should be rewarded with a much higher price over time.

Most of the banks that meet my selection criteria and also have less than $1 billion in assets are way too small to mention on Real Money. As part of constructing portfolios for the Trade of the decade I have been buying community banks with market caps of as little as $10 million. The average capitalization of the merged lists of Dr. McNabb and me looks to be less than $50 million. Your best research on these will be at the local Chamber of Commerce Happy Hour not on Wall Street. You can also use the information available at WWW.FDIC.Gov to check the latest financials and ratios for small banks. Community banks may not be the most exciting investment you ever make but over time they may well be the most profitable.

Einsteinian Investing

 I just started reading the new book, The Einstein of Money, a biography on Benjamin Graham by Joe Carlen. It is enjoyable read as in addition to being the father of value investing graham was a fascinating individual. His autobiography is long out of print so if you never read it, pick up this book as soon as you can. In my reading I was reminded that shortly before his death graham told interviewers from Forbes and Medical Economic magazine that he had developed a set of ten stock selection criteria that handily beat the market. 

The criteria include such metric as price to book, debt levels, price to earnings ratios, and balance sheet strength. Only at the bottom of sever bear markets have I ever found a stock that met all criteria but mixing and matching from the ten has also been proven to uncover undervalued market beating stocks. The selection criteria have been exhaustively tested by academics and practitioners and a couple of combinations have proven most profitable.

One of the most successful by far searches for stock whose:

 Earnings yield is twice the AAA bond rate

 Have solid earnings growth

Have a dividend yield of at least two thirds of the AAA bond rate

Have solid balance sheets with a current ratio of more than 2 and debt less than the book value of assets.

With bond yields as low as they are the threshold for earnings and dividend yield is not that high. It works out to a PE of less than 15 and a yield of more than 1.4%. You would think that there would be a cornucopia of companies that meet the criteria. Surprisingly that simply is not the case. Just 45 US companies meet the criteria to be included in the portfolio.

My favorite stock on the list is one that has shown up before on one of my undiscovered growth stock lists. Orchard Tissue (TIS) makes private label paper products including bathroom tissue, paper towels and napkins. They distribute their products though discount stores grocery stores and convenience stores in the Midwest and Texas. The company has grown earnings at an average rate of more than 40% the past five years. SO far this year both sales and earnings have continued to grow at a double digit rate. It is the most basic of businesses that is run efficiently and profitable selling for a respectable price. As a bonus they doubled the dividend last year and the shares now yield more than 4.5%. This stock sits at the very top of my “ load the boat” in a selloff stock list.

Some big tech names make t heist as old school tech companies begin got understand the value of retuning actual cash to shareholders. The recent dividend announcement by Cisco is something I have been suggesting for several years now. Although I am sure that I H ad no influence whatsoever it was a great move by the networking giant. Trading at 12 times earnings with a rock solid balance sheets, dominate position in its industry and a sparkling 2.91% dividend yield this is now a stock worth considering for long term value investors. The same can be said of Intel (INTC) at ten times earnings and a yield of 3.6%.

My favorite name among the big cap techs that make the Graham list is Corning (GLW). They will play a leading role in the strongest growth areas of the tech economy. The substrate division makes glass used in flat screen TVs and monitors and the fiber optics part of the company provides the fiber and cable needed to build out and improve high speed networks. Corning also has a presence in the potentially high growth environmental technology and life sciences industries. The company has more than $3 billion of net cash and no debt maturing until 2017. The have been using cash and cash flow to buy back stock and recently increased the dividend. The stock is one of the every few that fits almost all of the Graham criteria and I think it is a screaming buy at current level for long term investors. The stock trades below tangible book value and has a PE ratio of just 8.1.  At the current price the dividend yield is 2.57%. I think long term investors will experience some price volatility in the short term but be rewarded with spectacular gains over the next five year.

Grahams stock selection methods have stood the test of time and still uncover bargains that can reward investors with gains of multiple snot percentages over time.Before we move on from the Graham stock selection criteria, I want to look at another recombination of his criteria that has provided solid results over the past 25 years or so that I have been around the markets. Instead of earnings yield this time we will focus on my favorite tool, price to book value. We then look for those that are profitable and pay dividends to assemble our list of stocks. This has been part of my approach for many years now and it works as well for me as it did for Graham many years ago.

Curiosity got the best of me this morning so I ran a quick and dirty back test of the approach.. Over the past 25 years this approach has yield an average annual return of 40% more than the broad market.  Only four years staying of fully invested and using this approach showed a loss and in the year following a loss the asset based approach outperformed the market by an average factor 3 to 1.  It requires a great deal of patience and discipline but it works extraordinarily well.

My first observation upon looking at the current list is that is it absolutely dominated by small banks. Of the 81 names returned by screen 34 of them were small community and regional banks. Most of them are my tiny banks but a few are large enough to be familiar to readers. Republic Bancorp (RBCAA) has risen in price since I first talked about the Kentucky based bank but it is still statistically cheap. Fox Chase Bancorp (FXCB) is not the most exciting stock I have ever owned but it has moved steadily higher and is still very cheap.  The nest bargain issues however are the smaller institutions. The industry faces short term headwinds but many of the stock are too cheap not to own.

One of the cheapest non-financial stocks on a book value basis is Kelly Services (KELYA). The staffing company currently trades at just 70% of tangible book value as a weak global economy weighs on the business and stock price. Not only has the company been profitable since the end of 2009 in a very weak global economy, Kelly has reported a full year loss just twice in the past 10 years and that was in the near depression years of 2008 and 2009. There is a slow recovery starting in job in the US although Europe remains weak. Much of the hiring is temporary and that favors Kelly Services. This is a too cheap not to own stock and one of my top picks for a tough market.

American Greeting (AM) is also a very cheap stock with the stock at 70% of tangible book value. The entire greeting card industry has suffered as much of the communication world has gone on line, However there will always be birthdays, anniversaries and other occasion where online simply will not do and eventually American Greetings should see its business recover. They are the second largest global and only publicly traded greeting card manufacturer. It is not a sexy or exciting business but it is a cheap stock with a solid balance sheet as evidenced by it Altman Z score of over 3. Greeting card sales will grow in line with the economy and when this happens the cost reductions and structural changes implemented over the past few years will turn the company into a steady growth stock with an increased valuation.

The stock selection techniques outlined by Benjamin Graham back in the 1970s still work today. Although many talk about the Graham approach to picking stocks almost no one actually uses his approach and that suits me just fine. Buying cheap stocks requires a great deal of fortitude and patience. As an Orioles fan and value investor I have perfected both traits. 

Labor Day Once Again

At last Labor Day weekend is upon us once again. This weekend marks so many special things doesn’t it.? The kids are back in school and the cries of “but I am bored” no longer echo across the playrooms and backyards of North America. College football season begins as we rediscover that violence with half naked women cheering the contestants to greater fury is the true embodiment of America. The pennant races are real now as baseball gets serious. It is celebrated the same way we celebrated all our holidays with copious amounts of alcohol, the ritual burning of tasty dead animals in the back yard and road trips down crowded highways.

Most of us have some vague idea of what the holiday celebrates. It is to honor all those who work right? The image many of us get is that of a factory worker or coal miner when we think of Labor Day at all. Indeed the holiday was started to honor them and the growing Labor Union movement at the start of the industrial revolution. It is a day to honor the contributions and sacrifices of all those whose labor built this country and continues to feed the engine of production. The men who built the skyscrapers, poured the steel, mixed the concrete and laid the block that form the foundation of this great nation. The celebration started in Oregon and spread around the country. By the time it became a federal holiday in 1894 in the aftermath of the Pullman strike, 30 states already had set aside a day to celebrate the contributions of the labor force.

We still honor and always should, these people. Those who rise early and descend into the earth to mine coal, or head to the rigs to bring oil and gas to the surface power our nation. The factory workers assemble the products that make our daily lives better. Millions of men (and  women) with calloused hands load their trucks each morning to build the homes we live in, the roads upon which we drive and the buildings where we earn our living. Labors contribution to our nation is incalculable and should be celebrated.

When I think of Labor Day I tend to broaden my definition somewhat. I include every American who gets up and goes forward to earn their living by making a contribution to society. I think of guys like my friend Carl in Key West. He makes a nice living in Key West as a cab driver.  Now driving drunken tourists around may not sound particularly laborious I wonder how many lives Carl has saved keeping folks from driving drunk or wandering around the streets Island Drunk? I think of the Tic-Tac kid selling software that makes companies work more efficiently and on a more cost effective basis.   How many jobs have been created because his products freed up resources and made a business run more efficiently? I think of my journalist friends who chase stories all over hells half acre and back to keep us all informed. What about the kid at the grocery store who stocked the shelves on the night shift last night so you had fresh produce and other products available to feed and care for your family? How about the bartender who poured your drinks, listened to your bullshit, put the right game on the TV and the called you a cab at the end of the night? Or the cook at the restaurant who fixed that perfect meal, the waitress who served you and the bus boys and dishwashers who cleaned up after you? They all work their ass off and make our world just a little better every day.

The definition of labor needs to be expanded to include more of us on this holiday. You know who I think we should honor on Labor day? Working moms. Especially single ones. I don’t care if you are a factory worker, an executive, waitress or a stripper on a damn pole. Be a working mother is LABOR. Even in homes with a father present there are some jobs and duties reserved to Mom. After carrying your fair share and earning a living all day women still have to come home to the kids and be Mommy with baths to be given, homework to be checked, boo-boos to fix, stories to tell, house work to do and other tasks that are pretty much reserved to Mom.  The single ones have even more as they have no one to help them fix the meals, pay the bills do the dishes or laundry or all the other tasks of making a home. Being a parent is hard work but it is even harder for a working mom.  I am pretty handy around the house and work from home but no matter how much of I do my wife is still being Mommy after my day has ended and I am parked on the couch with a book and a ballgame. When you are celebrating Labor Day this year pop one of those cold frosty delicious distilled beverages in honor of every woman who  works hard to earn a living and even harder to be a Mom.

We do not usually think of business owners on Labor Day as they are generally consider capital and nor worthy of recognition. That’s just wrong. These people work their asses off, rising early to open the store, dealing with the bills, the supply ordering, the staffing, the taxes, payroll and regulatory crap before the first employee arrives. They have to greet the customers, fill in for whoever didn’t show up today, solve problems, be a marketer and cheerleader, handle employee  problems, stay on top of trends and opportunities in their industry. They have to deal with salespeople, vendors, complainers and regulators. The responsibility for others families fall on their shoulders and it is a heavy burden. These entrepreneurs get up each day to open the liquor store, the gas station, the restaurant, the jewelry store, the barber shop and host of other businesses that provide the products and services that make our lives easier and better. They spend their nights with ulcers trying to eat them alive from the inside out as they sweat out the choices between payroll and mortgage, new equipment and the kid’s school bill, paying taxes or paying the bills and the other hard choices they must make each and every day as they grow their business.  As they reach a level of success they are the ones sponsoring little league teams, buying ads in school programs, buying tables at special Olympics fundraisers and contributing to other community causes and concerns. They Labor to make lives better for themselves and their families and by doing so they provide millions of jobs and make our communities better places. At least one of those frosty gin and tonics in a sweat covered cold glass of lime tinged deliciousness should be downed in honor of the engine of America, the small business owner this labor day.

You know who else labors t and should be honored this labor day. Immigrants. It is controversial subject and many are here illegally but a good deal of that is the result of ignorant policy. There are some who come here just to take advantage of social benefits and I am in complete agreement with deporting these freeloading bastards. Same with those with criminal records. Bye-bye thanks for trying, go the fuck home. But those who come here to work should be allowed to do so. The image of the lazy Mexican or Latino is just bullshit. They aren’t taking jobs from anybody, they are doing the jobs that our spoiled ass society doesn’t want to  and this has been the case since the dawn of time. Immigrants have always come here to take the lower paid jobs that society needs done. They have worked hard, sometime holding two or three jobs to make a future for their family. I see the same thing today in immigrants.  Those that come here to work, work hard and contribute to their new nation.  We need an immigration policy that can keep out the parasites and criminals but allows those who to come here to work, contribute and write a new chapter of the American dream.   I hear fears from some small minded people that letting all these Hispanic and Asian immigrants may change our precious nation. There is no doubt they will. Just like the micks, kikes, krauts, niggers, polacks, lunkheads, hunkies, hillbillies, white trash, ragheads, frogs, wops, dingo fuckers, chinks, goat bangers, and other races and nationalities that have come here in search of a new live and new hope, they will change our nation. For the better.  We are a nation of immigrants and the great melting pot of America has room for new generations of workers, builders and dreamers. I raise of glass of well chilled glass of New Zealand Sauvignon Blanc in honor of those who look to come here to labor for their dreams.

I think of those in our Armed Forces who labor to protect our freedoms. From basic training onward military service is hard work. It requires discipline, commitment honor and the bravery to rush to the guns when required. They serve often in missions they do not understand. They serve a public that is not always grateful for their service. From the highest ranking General to the newest private they serve for far less money than they could make in private life. They labor for their nation and the ideal we try to represent and I will raise a glass of cold delicious frosty beer in a salute to their labor and sacrifice.

 I even think we should raise our glasses this labor day to honor some government employees. The policeman and fire fighters who risk their lives to keep our homes and families safe. Those who rebuild and repair our roads, sewers, highways, bridges and electrical lines that makes our lives so much easier and safer. Those who keep our neighborhoods cleaner and free of unsightly trash and garbage by carting all our trash and junk off to the dump should be thanked and honored. To those teaches who labor to educate our children and push them to new heights of achievement I offer my thanks and appreciation. All of those whose toil and labor to improve our cities and towns should be considered this labor day. I raise this crisp, chilled martini in your honor.

Of course I do not offer any honor to the bureaucrats, politicians, administrators, tax creators and collectors and other parasites who live on the public dime without offering any real benefit to society. To those who make it difficult for workers to work, first responders to respond, teachers to teach and citizens to thrive I offer no honor or respect. I spit this well used cocktail onion in your general direction.

It is Labor Day. I think the definition of the day needs to be expanded to everyone who rises each day to earn their daily bread, to provide for their family, to offer their children a better life, to achieve their dreams and earn their success. It does not matter if you wore a coat and tie, grease stained coveralls, a business suit and heels or a nurses uniform if you went to work to make your life more secure, your labor in pursuit of your own dreams has helped to make our national dream closer to a reality. This nation is built not just on the hopes and dreams of our citizens but the effort, yes the labor that has gone into reaching for those hopes and dreams. To the dreamers who work I celebrate you and lift my glass high in praise of your labor and your contribution to the world.

Now light the damn grill, turn on the game and someone get me a refill. Happy Labor Day to all.

Invest or Bet?

Last night I had the inevitable discussion when we talk about how to select stocks. If you stick to value, Tim, you are going to miss all these great companies with such great products. The current spin off these days is where and when do you buy Facebook (FB). After all they have a billion users and are the new face of technology.  How can you just skip a stock like LinkedIn (LNKD) that is the future of networking and job search? What about game changers like Amazon (AMZN)? They have moved reading from paper to bytes and killed big retail for books and electronics.

All of this is true but there is another truth that needs to be considered.  These are great companies but they all have a value as a business. When I evaluate a stock I calculate the tangible book value, an estimated liquidation value, a financial value and strategic acquisition value based on current multiples and an ongoing intrinsic value. My models may not be the most eloquent but the time I am done I have what has proven to be a really good rough estimate of what a company is really worth as a business. Most of these darling stocks are great companies but the price is far disconnected from business value they are little more than betting slips in my opinion.

My more vocal opponents remind that these are great growth companies and you can’t value them based on current numbers. You have to consider all the fabulous growth in earnings and revenues. You have to price in potential. I think that is ridiculous but decided to give a try and see what the results were if we priced these stocks as ongoing concerns and based my ongoing concern intrinsic value based on the sunshine and lollipop estimates of Wall Street for these great companies.

I will start with Facebook the granddaddy stock that is the subject of endless discussion. I will start by saying I think that this company is a great example of Nassim Taleb’s theory of success. They just got lucky and were in exactly the right place at the right time. Management has not shown any exceptional talent for decisions or business and I doubt the company will be the raging success advocates are hoping. Having said that based on today’s numbers my intrinsic value calculation is $9.38 a share. Ridiculous given all the wonderful potential right? Now let’s apply the analysts’ estimates of a 30% earnings growth rate for the next five years. When I use those projections I come up with a value of $25.50 a share for the company. However that is based on numbers five years out so I have to discount it back to today.  Using a 10% discount rate (yes it is high. Using a low discount rate in future value calculations is absurd in my opinion) I come up with a value for the stock of $15.52.  Even with all those rosy assumptions the stock is still overpriced at current levels.

The exercise produces similar results for the other darling stock. LinkedIin on today’s numbers has an intrinsic value of about $14.57. If I use their highly optimistic 66% a year growth rate for the next five years I get a number of $73. Discounted back to today that is roughly $46 a share.

 Amazon today is worth roughly $31 a share. Based on the projected 30% growth rate the numbers based on the potential in five years the valuation is$58.25. Discounted back at a reasonable rate of return that value becomes $36.

 Apple (AAPL) has a value on today’s numbers of $337 a share and using a 21% growth rate the number becomes $769 discounted back to $477.

Just a sure as the sun came up today someone is going to take great umbrage at the discount rate used in my calculation. You would be better served by focusing on the fact that only Apple, and that just barely, trades for less than the undiscounted valuation derived using very aggressive 5 year estimates.

These are great companies that do indeed have world changing potential. However their stock price is not reflective of current or potential business value in my opinion. They are priced as betting slips in a personality contest. Trade and invest accordingly.

Follow the Leader

In addition to never learning to play the piano or hit a curve ball I really regret never learning to program. I love to sit down and play with market based ideas and concepts.  I have some friends who can have 20 years of data scrolled up and crunched in R before I can get the idea out of my mouth. On my own however I have to crunch it all though good old Excel and it can be a tad laborious. I am told it is painful to watch and I have invented new words during particularly cumbersome projects. I recently tested some ideas related to insider buying and I am happy to report that Jon Moreland’s databases at Insider insights make it easy even for me.

I have been playing around with a simple idea for a few weeks and testing verifies I am on the right path. The CEO and CFO of a corporation know more and the condition and plans of a company that anyone else. When they buy a large amount of stock in their company it would seem to be a significant event in my opinion. I am happy to report that my suspicions were correct. From 2008 to the end of 2011 riding the coat tails of the two top executives resulted in 75% winning stock picks with an average gain of more than 80%. So far in 2012 we have 36 of 48 winners with an average gain of 74% according to the database test.

I only count direct open the checkbook and buy in the open market purchases. Option exercise, stock grants and other forms of compensation are not included in my search. The individual buy has to be at least $50,000 in value to make the list. For the purposes of the study the shares are held until then of the calendar year. That actually caps the potential gains but it also saved me about two hours of wrestling a spreadsheet. It appears that a longer holding period delivers higher returns confirming that insiders tend to be long term investors in their company shares.

 Looking at the data we can often go many weeks, and even months, between buy signals. However ion the past couple of weeks we have seen some strong buying activity that might be profitable trading and investment opportunities. The largest purchase was of course the monster $17 million dollar investment by JP Morgan (JPM) CEO Jamie Dimon. Although a large chunk of the purchase was funded by the sale of preferred stock Mr. Dimon opened the checkbook and added about $3.6 million to buy shares. The last time he bought shares was in January of 2009 and although they fell sharply after he purchased the stock recovered and he now has a gain of more than 50% on those shares.

We also saw buying on one my favorite long term banking names. Both the CEO and CFO of First Niagara Financial (FNFG) have been buyers of their company stock in the past week. CEO John Koelmel purchased 25,000 shares and CFO Gregory Norwood added 10,000 shares to his stake in the company.  Two directors were also decent size buyers of the shares recently. The stock currently trades at a small premium to tangible book value but with an equity to assets ratio of 13 and nonperforming assets below 1% of total assets the bank is a solid investment. It’s up sharply today but I would be a buyer in a market decline with the intention of holding for many years.

Boston Scientific has struggled over the past few years. The company has struggled in the very competitive market for hear stents and although they have several new products for the cardiac rhythm management market sales have yet to take off in a meaningful way. 45% of the company’s revenues are form the stent market and BSX is struggling to gain market share in a crowded field. The CEO, William Kucheman, appears to think that the new products and increased exposure to emerging market swill lead the company fortunes and stock price higher as he recently opened his checkbook and bought an additional 10,000 shares of stock. Last week President Michael Mahoney also purchased 22,000 shares of BSX in the open market. I like this stock as a long shot stock pick for aggressive minded patient investors.

Following the top executives of a company when they buy shares is not foolproof but it does tip the odds in your favor. Always do your homework but it makes sense to track CEO and CFO open market stock purchases.

Originally Published on RealMoney on 8-3-2012

Hedging and Shopping

Two months while expressing some concern about the markets I played around with ways to hedge the risk of news driven volatility in a portfolio. I formed some portfolios that were hedged dollar for dollar short position in the index. I looked at using the biggest 52 week losers among index components, those  yielding at least 3% and trading at new lows and the ones trading below book value. I also had one using F scores but that failed almost out of the box and was discarded. The results are informative and I want to review them and share some other observations about the portfolios. I am also going to rebalance and continue testing this approach.

The portfolio of stocks at new lows didn’t work that well. Overall the mix had a two month return of (1.76)%. As the market rose 10% the long positions gained just 6.59%. Although 16 of the 20 stocks went higher the four losers averaged more than 11% with GameStop (GME) and Lexmark (LXK) leading the way on the downside. I am going to keep tracking this one to see how it performs when we finally have a down cycle in the market. As a long biased portfolio the short term results are disappointing. If you were leaning short two months ago as many were this approach saved you a ton of cash.

The portfolio of stocks trading below stated book value did well in the rally. Overall the fully hedged portfolio gained 4.53%. 9 of the 11 stocks went higher for an unhedged gain of 19%. Unfortunately since we used stated and not tangible book Alpha Natural Resources (ANR) was in the mix and the shares declined more than 34%. Stocks like First Solar (FSLR) Phillips 66 (PSX) and NRG Energy (NRG) led the way higher with huge gains in the tow month period. If you were long biased but nervous this approach has worked okay for you so far.

The star so far is stocks with the largest 52 weeks losses. This was a portfolio that was long stocks down more than 50% in the last year hedged dollar for dollar with a short index position. The portfolio gained 6.28% over the two month period. The unhedged portfolio of losers would have shown a gain of 22.67%. Although 6 of the 15 stocks continued to move lower those that rebounded flew. Sprint (S) more than doubled. First Solar (FSLR) was up nearly 80%. Metro PCS  (PCS) stock price is up more than 60% higher than it was just 8 weeks ago. This seems to be a method that may have value for nervous investors looking for hedged exposure to an uncertain market. It’s early in the test but I will be watching developments with this portfolio carefully.

It is also instructive to look at the stocks without a hedge. Traders may want to start focusing more on stock in the index that are falling knives with large 52 week losses instead of the momentum darlings. These issues have rebounded sharply rising far more than the broad market. In today’s low volume short term trading dominated market once the fundamental sellers such as mutual funds and institutional asset managers are done exiting the stock there are few natural sellers left. When the index buyers and traders move into the long side of the market the buying pressure in the absence of sellers causes short covering and spectacular rallies. With no fundamental selling taking place these issues should track the market or even outperform slightly on the downside.   With a reduction in the number of natural sellers and absence of retail investors it appears that losing stocks may revert to the man much faster than years past. At least that’s the theory and I plan to continue tracking the results of these portfolios.

Hedged mechanical portfolios are not part of my regular activities but is a fascinating subject. In addition I suspect there is valuable information to be garnered by tracking and testing these ideas.When I was reviewing the hedging strategies yesterday I was impressed by the returns some of the individual stocks posted during a two month period. The list definitely provides traders with a solid source of ideas but I was curious to see if the current selection provided long term investment opportunities as well. I decided this morning to sit down and use them as a shopping list to see if there were any true bargains. I have written in the past about the strong returns available by investing in S&P 500 stocks trading below book as well as catching the falling knife stocks that had declined more than 50. I have not tested the higher yielding stocks at new lows but it is an interesting idea and may provide an opportunity or two for investors.

The largest stock on the list is McDonalds (MCD), a company I love to hate. This is a great company and one of the great American success stories. They dominate their industry and have one of the widest moats in the history of the world. Much like Coca Cola (KO) you could not recreate the brand with any amount of capital investment.  As the parent of a 9 year old I hate the place. The dividend yield is over 3% and the payout has grown by more than tenfold in the past decade. It is reasonable to assume that the dividend will continue to grow in the future. However the stock is not cheap on any reasonable metric for a long term value investor. The shares trade at 6 time book value. The EV/Ebitda ratio is ten and the price to sales is a healthy 3. Even at close to 52 week lows the stock trades at twice my estimate of intrinsic value. This is a stock that should be on your buy in a crash blue chip list but it is far from a bargain today.

One stock that does have some bargain appeal is Safeway (SWY). Having owned both Winn Dixie and SuperValu (SVU) over the past few years I am well aware of just how bad the grocery business is today. Wal-Mart has endeavored to crush the competition and for the most part succeeded. To complicate matters the weak economy has made it very difficult to pass along higher food costs to consumers. Safeway is one of the bigger chains and better known company’s in the industry and should be among the survivors of the industry. While the shares are not cheap on a book value basis the shares trade at an EV/Ebitda ratio of less than 5 and a price to sales ratio of less than $.10 on the dollar. Safeway also trades at a healthy 30% discount to my estimate of intrinsic value. The stock yields 4.6% right now and management has better than tripled the payout since 2005. Safeway is a solid company in a tough business and the stock should reward patient investors.

Shares of office supplies retailer Staples (SPLS) fell sharply recently as a result of weak revenues and lowered guidance. The stock now trades blow the 2009 lows. In addition to weakness in Europe US sales slumped in the quarter as businesses become more cautious about spending. The release of Windows 8 is expected to give some support to top and bottom line in the last quarter of the year. I suspect that we still see some continued weakness however as many businesses are delaying spending until after the election when the regulatory and tax picture is clearer. Staples in the largest office supply company in the world with sales of $25 billion so they should be able to weather the storm. They also have exposure to emerging markets that could drive long term revenue growth so there are some positives in the picture. The company has done a lot of acquisitions over the years and is not cheap on tangible book bases but the EV/Ebitda ratio is just 4.4 and the shares fetch just 70% of my intrinsic value calculation. At today’s price the shares yield more than 3% so you do get to paid for an economic turnaround to life the profits and share price.

Using the list of dividend paying stocks in the S&P 500 near new lows seems to be a useful approach for finding stock ideas. Not all of them are cheap but some are cheap enough to consider for long term investors. I would probably wait for a solid market pullback to buy any of them .

Civility, Municipal Bonds and Playoff Baseball

I have noticed of late a disturbing lack of civility in the world. Keep in mind this is coming from me. I couldn’t wait to grow older as I ASPIRED to be a curmudgeon. I am far from politically correct and have been known to be moderately to excessively foul mouthed at times. I call a fool a fool and will call you out for stupid statements if you insist on making them. Even with these truths, at a basic level of society I see all pretense of civility and basic kindness to others disappearing at a raid rate.

I blame the internet. You can be anyone anywhere on social media and this emboldens folks to say things they would not have to balls to say in person. Some think that being a semi arrogant asshole is hip.  One such character suggested the other night that I perform physically difficult sexual acts upon my person in response to a fairly innocuous, and certainly not insulting, remark. In the ensuing exchange we ended up blocking each other’s accounts. It’s a shame as the person in question occasionally had some interesting salient points to make but his need to embrace his inner asshole overrode any value he may have provided. I don’t care how brilliant you are, or imagine yourself to be, life is too short to put up with assholes.

The trend towards uncivil conversation is most marked in political discussions.  I am appalled by the things those on the other side tend to call each. Nazi and communist are two of the nicer labels tossed around.  Incredibly it is the least informed that yells the loudest and resort to the most base of insults. Volume replaces intelligence and fuck you stands in for actual policy statements. I love a good argument or spirited political discussion. I happen to think both parties are evil personified and delight in hoisting their adherents on their own petard any chance I get. However I have never lost a friend or resorted to base insults as part of the discourse. I have certainly never insulted someone I have never or just met over their political beliefs. I may think it but civility demands I get to know them better before informing them of their intellectual shortcomings.

It has spilled over into everyday life. I may be happy and quick to tell a Red Sox fan that they root for a slime encrusted scum sucking baseball team but in my day to day life I try to be civil to those whose path I cross. Please, thank you, have a nice day, excuse me, pardon me are all phrases that are disappearing form the world. People seem to think that being rude to a server or store clerk is a birth right. Pushing and shoving through crowds is the norm not the exception at most venues. By the way I can now confirm that this is indeed truer in the North than the South.I heard thank you and excuse me more in the first week in Orlando than in a year in the Mid Atlantic.

I am never going to be the nicest guy in the world. I will always have a foul mouth.  I will never suffer fools easily. But I do manage to get through the day without going out of my way to antagonize, belittle or insult those I meet along the way. Unless they really deserve it. You do not have to be a milquetoast but there is no need to be a random and constant asshole either. Save that shit for your friends like I do. They are used to it.  Especially those who root for the Red Sox and believe in growth stocks.

Warren Buffet has caused a bit of furor in the municipal bond markets in the past week. The sage exited his portfolio of credit default swaps on munis to the extent that he could. He still holds some but any he could contractually cancel were cancelled by his insurance companies. This caused quite the  conversation and lit some of the investment oriented social media networks on fire. Is he concerned about state and local government finances? Some speculated it was a reallocation of assets to a higher return vehicle but since they have cash to the tune of $40 billion that they have been unable to deploy I doubt that is the case. I think it is simple math. If there is a 20% chance of a muni financial meltdown then writing the swaps has a huge negative expectation. Simply put the squeeze is no longer worth the juice and Berkshire wants out.  

We will not hear from Warren on this matter unless we get widespread defaults.If that occurs Warren will come out and in a self-deprecating grandfatherly fashion inform us that his extraordinary common sense has once again saved him from a grievous error. If nothing happens we will never hear another word about the decision.

Some postulate that this indicates that we are on the verge of a huge meltdown in the muni market. Dear God I hope so. Right now long term municipal bonds yield a little over 3%. That’s not worth the risk of owning for long term investors. I would love to see a sell off in this market place. Muni yields of 5% or higher are a long term conservative income investors best friend. I do not think we will see a sell off as a result of Warrens moves but interest rate movements and government policy may push yields higher over the next few years.

I am not a muni expert by any chance but I have learned enough over the years to know a few things. From 1953 to 1980 muni yields rose almost continuously. From 1980 to today yields have fallen in similar fashion. Buying during recessions has always been a solid profitable trade for muni buyers. GO default rates are very low even when times are horrible. Buying individual binds works better than funds. Unless you can buy a closed end municipal fund at a double digit discount. Yield chasing in lower rated or unrated binds is a horrible idea unless you have very specialized local knowledge. Municipal bear markets are usually the result of a rising interest rate environment. Sell offs are usually a result of a lack of buyers rather than widespread selling. Most munis are held by individuals, funds and insurance companies that are very slow to sell in volume. From 1970 to 2009 there were 54 muni defaults. Only three were General Obligation bonds. The default rate of AAA binds over that period was 0. From 1970 to the end of 2011 there were a total of 71 defaults by rated bond issuers. 2450 unrated bonds defaulted. Don’t buy unrated bonds without in depth specialized and local knowledge. Never ever buy muni closed end funds on the IPO or at a premium to NAV. Wait for those rare occasions when they sell at large discounts and buy the higher quality portfolios with great abandon.

The day to day minutiae and movement of the muni market is over my pay grade. For individuals the rules are simple. Buy when we are in a recession, interest rates have risen and you can lock in yields of 5% or greater. Buy when Muni funds trade at discounts. Ignore what Warren Buffet says or does. You are not Warren and contrary to his persona he does not give tow shits about you or your portfolio. That goes for every other guru and talking head. Think for yourself and go opposite the crowd in all markets.

  Looking at baseball the standings tell me we have an interesting Spetmeber coming up. All of the divisions are fairly close with no lead being more than 6.5 games. In the NL East it is Washingtons to lose and I do not think they will. Even if they shut Strasburg down early to save him for the playoffs they have the best pitching staff in the league. They have a team ERO of just 3.24 and teams are hitting an enemic  .232 against them The bats aren’t bad either. The team is fifth in the NL for batting average and fourth for home runs. Atlanta has a shot and the teams play six more time before the end of the year but I don’t think they can do it. Davy Johnson and crew will make a playoff run and I would not be shocked ot see them in the series.

No one is going to catch the Reds in the Central Division. They are sixth in average and second in home runs. The pitching staff is third in ERA. They have a tough schedule but Votto will be back for September and I think they finish s strong. Pittsburgh will make a run but I do not think they can catch the Reds.

The Giants and Dodgers have five games left to play against each other. The Dodgers need to sweep them as the Giants have a far easier schedule to finish the year. I think they do and the Boys in Blue are playing ball in October.

The Giants will be there as well. I think they beat Pittsburgh for the Wildcard.

In the AL West the Angels are going to have make an incredible run to make the playoff picture. They have the talent. They have the talent but do not seem to have the will. If Oakland continues to win the most talented team on paper will miss the play-offs. Texas wins the division going away.

Chicago is second in the AL in home runs but Detroit is hitting for a much better average. The pitching staffs are close with both hovering around a 4.0 ERA. They have seven games left against each other. Whoever wins that series wins the division and goes on to the playoffs. I think it is Chicago this year. The Robin Ventura story and Adam Dun comeback  are just too good for the baseball gods to ignore.

In the East it’s the Yankees once again. Tampa Bay has a pitchers chance and may make it interesting but the Yankees just have too much offense. With a fifth in the league ERA the pitching staff is not terrible and they will hold off the pesky Rays. Baltimore has chance f the pitching staff holds up and they can continue to hit the long ball. The September schedule in the AL East is brutal and that favors the Yankees.

There is a very good chance that the Orioles and Rays play the wild card game. If that happens I think the baseball gods will honor the 15 years of sacrifice and send the Orioles to the next round. If they fold then the Rays will probably face the second place Central division team and get homered into postseason oblivion.

That is all for today. To sum up:

Be Fucking Nice.

Buy munis with over 5% yields or when the CE funds trade at a double digit discount. Ignore the noise.

The Orioles have a shot at this thing. 

Mandels and Alligators

We are finally pretty much settled into the sunshine state at last. They really should call it the “sunshine interrupted by a few hours of intense end of the world type thunderstorms” state. It is of course summertime in Florida and it is hot during the day and just about every afternoon you get a low budget end of the world movie type thunderstorm to shake things up. We really hit the neighborhood lotto given that we negotiated everything from Maryland and had a friend check the place out for us. The Summerport neighborhood of Windermere is as close to sitcom perfect as you can get. Lots of kids, friendly neighbors so far, trails for walking and biking, countless lakes and ponds in the area, a great pool and just about everything else we hoped to find.

To sum up, I fucking love it here. My northern friends worry about the heat of summertime. Who gives a sht. Yes it is hot and humid but so is the Mid Atlantic in the summer. You will never hear me bitch about the heat. I will sit on the lanai (Floridian for screen in porch) and read a book, smoke cigarettes and drink iced tea in the middle of the day. I take the dog for several long walks a day regardless of temperature. The upside there is that I lost about 10 pounds since we got here without giving up grease or gravy. I love this shit. I will love it when there is a foot of snow on the driveways of my “can’t handle the heat “friends up north. No one ever shoveled sunshine. Getting me back north of the border may turn out to be impossible. I should have moved here when I first started thinking about ten years ago. I can take all the old people move to Florida jokes. Fuck you I am getting old and I live in Florida. I have mandles and a sun hat. Kiss my happy ass.

One of the cool things about this development is that they have kept a ton of open space and left large pockets of undisturbed nature. In this case this means lot of lakes and what was once a swamp apparently. Every day on my walks I see a shitload of wildlife and birds. Now, herons, cranes, armadillos and lizards of various stripes are interesting but I am absolutely fucking fascinated by alligators. I see one or two a day at least lurking with their nose and eyes just above the waterline in the various ponds and lakes around here. Most of them are smallish but we did have about a five footer swim over to take a look at us one day. They are just stealthy fucking death machines and cool to watch. I am told that when they get over six feet or so or become aggressive they are removed to less populated areas and I have to admit I cannot fucking wait to see a gator capture on one of my walks.

Now lets move on to more interesting topics. The market continues to befuddle and bewitch most participants. Old traders and investors as just confused as shit these days. All the old patterns, statistics and told that worked for decades just are not worth a shot right now. The macro guys are getting screwed like a hooker holding a two for one sale at a Viagra clinic. There are almost no carry trades left with the developed world holding firm to ZIRP and money printing. The macroeconomic fundamentals are just fucking horrible but the central banks keeping throwing the markets treats in the form LTRO and money printing so shorts get just crushed in spite of near depression levels of economic activity. To make it worse China has discovered a new source of enjoyment in screwing traders with rhetoric. Gonna ease, shorts get crushed. Growth slowing, longs get crushed. I suspect they are just making this shit up and then watching the carnage they create in the markets.

It is no better domestically. Jobs still suck. Real estate is being talked up but there is another wave of foreclosures to come in many areas of the country so I doubt we have a true bottom yet. The first guys to call a bottom usually get crushed and I suspect that happens here. The introduction of hedge fund money into the rental real estate market is probably going to create an excess of rental single family homes while simultaneously driving purchase prices up at the same time. If I was sitting on a shitload of cash I would get in front of the funds right here and accept some downside pricing risk on rental homes. You can get a better price and pick up a much higher term rental yield that the funds will be able to when they all rush into the local markets.  I would become best friends with the officer of every bank in town that has OREO on the books and offer to take it off their hands at a reasonable price. We are not at a bottom but we are close enough that a shitload of money can be made, especially if hedge and private equity money begins to distort valuation over the next few years.

The stock market has worked higher even as the fundamentals worsen. Revenues this earnings season were just awful. Margins held up and are still at historic highs as corporations fight to control costs and caught a break from lower material costs in the quarter. We have seen many of the mo-mo stocks get crushed in here as a result of revenue shortfalls, earnings misses and lowered guidance. The sluggish economy is catching up with many of these stocks and this is usually a warning sign.

If you dig deep enough into the market there are still opportunities. I like the long term outlook for commercial real estate and think REITs like KRG, CDR, CWH, NRF and ABR will pay off huge for patient investors. Gradual improvement sin both commercial and residential real estate are going to help the banks improve their balance sheets and I like regionals like KEY, HBOS and HBAN. Smaller banks are facing higher regulatory costs and many will have to be sold to larger acquirers. I have a list of about 100 banks that trade below tangible book value, less than $1 billion in assets and excess capital. I expect to make a lot of money off these names. I am watching the 13d filings of bank activists like Joseph Stillwell and Lawrence Seideman for cheap banks with a potential catalyst.

 My energy names have all rallied well. Stocks like PTEN, NBR, PVA and HES have done extremely well. I am not going to chase them here nut I am not selling any either. I would be a buyer of EXCO on any weakness. Natural gas prices have improved but they are still very low historically.  Coal stocks have seen a dead cat rally but more problems lie ahead for these companies. The debt side of the coal picture is much more attractive than the equities right now.

I don’t really have a clue what the stock market is going to do. Neither does anyone else. Anybody with a strong conviction about the next 6 to 12 months in the market is a fucking idiot in my opinion. The market is not particularly cheap at a 16 trailing multiple and a Schiller PE well above the long term averages. The economy remains weak and it shows in corporate revenues. We are seeing cracks in market leaders. The fiscal cliff is looming. On the flip side sentiment readings are pretty neutral and indictors from the options market are actually bullish over the short term. Zero interest rates policies will be with us for two more years at least and this pushes money into stocks. We have never seen this type of global central bank activity so it is almost impossible to know what will happen. I am sticking with a policy of reacting rather than predicting and buying what is safe and cheap.

It is an election year so I guess I should comment on politics. Here is my comment. We have two groups of people telling us how much of our money they will steal and exactly which freedoms they will curtail and the great pool of idiocy that is the public is actually arguing which is better.  I swear to god if the republican would just say freedom means free and in addition to lowering taxes and creating jobs we no longer care who you fuck or what you do with your body they would never lose another election. They are just too fucking stupid. The libertarians say it and Gary Johnson is the best candidate they have ever had but the party has too weird an image to gain ground with most Americans. A quote in the Orlando Sentinel today sums it up. People like to vote for names they recognize. You fucking idiots are getting spoon fed pure shit from two sides and arguing over which tastes better.  Having said that I think that Mr. Obama has been an unmitigated disaster and has to go or we face real problems in the US. We cannot afford his brand of big government solutions. There is at least a hope that Romney will use more lube while fucking us.

Any politician who talks about anything but jobs and education is just another form of thief and liar. Quit relying on sound bites and ask yourself if you really want to pay for your neighbors at the point of a gun. Do you really want someone else determining who you can marry? Should a politician be in charge of your healthcare? Your personal habits? Your sex life?  Do you want your children dying to keep the peace in some far off land that even Sally Struthers won’t visit? I do not. Both parties are selling a version of lies that has nothing to do with freedom, liberty or prosperity. Provide a background where the economy can grow and provide jobs and the local infrastructure to give my children a world class education without the latest per theories and concepts fucking up their little brains. Beyond that Mr. Candidate and office holder take your good intentions and shove them up your ass. I really do not need you to run my life.

Now onto more interesting and important stuff. It is mid-August and the Orioles are still relevant. We are six games behind the Yankees and in a dead heat for the wild card right now. We are playing impossible ball and winning in spite of terrible stats. We have a huge negative run differential. We are 23^rd in the majors hitting just .244. it is sure a s shit not small ball as we are dead fucking last in stolen bases. It is not defense as we are also dead fucking last in fielding percentage. It’s pitching with the fifth best team ERA and the long ball as we are fourth in the majors in home runs. It has to be management as the team is not looking any different than years past but we are winning and the bull pen is delivering like it has not in years. Whatever it is I will take it. The team is fun to watch and we matter in August. That is a lot more than I could have hoped for in April.

On the football front I have to pick some new teams. I will still cheer for the Ravens but I will only see their prime time games down here in Florida. Besides football is more fun when it’s local. I am going with Buccaneers since they are closest, the Jaguars suck and I spend too many years hating the Dolphins to cheer for them now. On the college side it was a bit more difficult. I could have gone with Miami as the U has been a great football school over the decades but they are too far away and the team looks like they will suck. FSU is a team I have rooted against forever. I am going with the University of Florida Gators. Gainesville is closer and I am fucking fascinated by alligators. With my sunhat, mandels and the cool ass blue shirt with an orange gator on it I am going to one stylish motherfucker all season long.

Life is good. The kids are all good. The wife is fantastic. The sun is one bright shining warm ass son of a bitch. I have palm trees and alligators.