Low and Slow, Prudent Buyers and Barefootin

We continue to see a mixed bag in the US economy. For every good number or comment we see a negative development or commentary. For instance Jamie Dimon was pretty upbeat about the US economy recently saying “"What we see is a strong consumer. Asset prices are up, 13 million more people are working, wages are going up, household spending is up.” On the other had Bill Gross said to sell all stocks and bonds because QE is not working. He said in his latest outlook “The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund. Without the latter, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth. In the U.S. 4-% is necessary, in Euroland 3-4%, in Japan 2-3%.”

Dimon thinks we can get there saying “"If the next president focuses on the right things, I think we're going to 4 percent. Those right things are proper immigration reform, proper infrastructure spending. The Democrats say spend a lot of money. I kind of agree with that. The Republicans say it shouldn't be bridges to nowhere, big pork barrel [projects]. I agree with that." Of course he is betting on what I think may well be the two worst choices for President in my lifetime if not in history so that argument breaks down a little.

Who is right ? I have no clue but fall closer to the Bill Gross point of view than the more optimistic one expressed by Mr. Dimon. I think he will eventually be right as the spirt of entrepreneurship and innovation that has always driven the US economy will eventually prevail but we have a lot of economic and particularly political hurdles to jump before we get there. I think we have to think like Joshua Harris outlined on the Apollo Global call yesterday. He told investors “I think we all need to just be accustomed to the fact that we could be in the zero rate environment for a prolonged period of time. I think a lot of that is going to depend on kind of how the economy themselves do and that is unpredictable. But I think you have to go into this kind of being cautious and try to find ways to deploy capital where even if things go wrong and rates go up and the credit cycle time is against you. So, we are okay and make some money but I think that, I think my personal base is that is to go out for a period of time.”

The other problem for us as investors right now is that valuations are simply too high in many assets to justify being an aggressive buyer. We are finding opportunities in community banks and on the income side closed end funds and business development companies associated with major private equity firms but beyond a handful of special situations that I think have the potential to triple or more in the next few years like Volt (VISI) and Unisys (UIS) I am comfortable sitting in my hands and do nothing. I am still not a seller but I am definitely not a buyer of most equities right now either.

One benefit of all that free time is I can keep up on my reading and right now that means a lot of conference call transcripts. As the piece I sent out this morning reported one of the big takeaways is that community banks are preparing for a huge expansion in M&A activity. The list of sound bites I sent this morning tells me that everyone is catching on to tow important facts about the banking industry right now. First you must grow the bank to keep your investor base satisfied and two the easiest way to grow the bank is via intelligent M&A. If you are not involved in community banks you should be. We are offering a Banking on Profits for 50% off for the life of your subscription with The Community Bank Investor included at no additional charge right. Take advantage by clicking here and using coupon code 50OffBoP.

I have also listened to a lot of REIT calls. Basically right now it’s a great time to be an owner of commercial real estate but a touch of prudence needs to be applied as a buyer. There are over heated segments and markets right now. It is no secret that I like REITs almost as much as I do little banks and we own a lot of them in both the Deep Value and Value income portfolio. I also have my eye of Eurozone and UK REITS right now as they are fast approaching levels where I feel like I have to be a buyer of some of them. REITs have outperformed the S&P 500 over every imaginable time frame and do much better then stock in bad markets but we need to be careful buyer right now. I am also tracking some REIT focused closed end funds that may give us a way to back into the sector on the cheap.

Of course I am also getting plenty of time to engage in some recreational reading as well. I was going to reared some of the early Doc Ford novels but I recently discovered that Ron Base has 5 Sanibel Sunset Detective novels I have never read before and that is now priority 1. On top of that there is pennant race baseball with several tight races to enjoy until it is once again time to be ab enthusiastic and aggressive buyer of stocks.

Tim

Economy is slow, stocks are rich. Might be a good time to buy a bunch of little banks and head to the beach for some https://www.youtube.com/watch?v=8TlUvgfGQPA

Posted to Banking on Profit on Aug 04, 2016 — 3:08 PM
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