It has been a busy two weeks around Chez Melvin since I last sent out a Thursday note. Between the trip to Atlanta for the FIG Bank Conference and the weekend venture down to Sanibel for our anniversary, I was on the road and out of the loop quite a bit. One of the nice things about the way I invest is that I don’t have to be in the office every minute watching every tick and trade. When you are a long term holder of stocks the minute by minute is hardly crucial, freeing me up once in a while for more important activities.
The Atlanta Conference is always one of my favorite trips of the year. The bankers I spoke with this year were pretty upbeat about the prospects for their banks and the industry as a whole. Net interest margins are still a big problem but credit conditions are still excellent, and loan demand is steady, especially in urban markets. M&A is still the best path to growth, and the fact that rates are not rising anytime soon is forcing more banks to consider selling their bank. Rising technology costs are also a factor in the sell decision. You have to have all the digital and mobile bells and whistles are a must to compete in all but the most rural markets and they are expensive. If you can’t spend the money, you have to sell the bank.
The flip side of that coin is that the banks that are buyers are gaining the scale they need to invest in technology. Not only does this attract and retain customers but the right technology package allows banks to streamline operations and reduce costs. More mobile offerings and a high acceptance rate among customers are allowing some banks to reduce branch expenses. All of the savings achieved by smart technology investment eventually ends up on the bottom line, and that’s good news for us as investors. It is still very much a “grow or sell” environment in the community bank space, and either of those is a profitable outcome for us as investors. Buying community banks for less than book value that have an activist investor as a shareholder remains very much a win-win proposition.
Janet Yellen had a news conference following the recent no hike announcement. She told us that “Economic growth, which was subdued during the first half of the year, appears to have picked up. Household spending continues to be the key source of that growth. This spending has been supported by solid increases in household income as well as by relatively high levels of consumer sentiment and wealth. Business investment, however, remains soft, both in the energy sector and more broadly.”
She explained the decision to not raise rates during the presser. She said Returning to monetary policy, the recent pickup in economic growth and continued progress in the labor market have strengthened the case for an increase in the federal funds' rate. Moreover, the Committee judges the risks to the outlook to be roughly balanced. So why didn’t we raise the federal funds rate at today’s meeting? Our decision does not reflect a lack of confidence in the economy. Conditions in the labor market are strengthening, and we expect that to continue. And while inflation remains low, we expect it to rise to our 2 percent objective over time. But with labor market slack being taken up at a somewhat slower pace than in previous years, scope for some further improvement in the labor market remaining, and inflation continuing to run below our 2 percent target, we chose to wait for further evidence of continued progress toward our objectives. This cautious approach to paring back monetary policy support is all the more appropriate given that short-term interest rates are still near zero, which means that we can more effectively respond to surprisingly strong inflation pressures in the future by raising rates than to a weakening labor market and falling inflation by cutting rates.”
Yellen also addressed what I think is one of the biggest challenges and risk sets facing us as investors today. The Fed Chair is aware that “Interest rates both here and in advanced countries around the globe appeared to be very low. And that is an environment that, if we do have to live with that for a long time, we have to be aware that it does give rise to a reach for yield as individuals and investors seek to, perhaps, take on risk or lengthen maturities to seek higher yields. And I think we should be concerned about that to the extent it creates financial stability risks.” There is a lot of yield-starved money out there, and too many bad decisions create over valuations that markets will eventually correct to the dismay of owners. Valuation has to be the driver of investment decisions and a rigid discipline to stay the course when bargains are hard to find is mandatory for long term success.
I did a lot of driving last week distance between Atlanta and Orlando and back, and the three-hour drive along back roads down to Sanibel. I continue to find that once you get out of the urban areas, there is no economic growth. You just are not seeing much activity once outside financial centers. There are still plenty of empty stores and empty buildings in the rural areas where the impact of ZIRP has been negligible. Once you get down the interstate a bit outside Atlanta, you simply do not see much building activity in South Georgia and North Florida. While you can’t see the whole town from the interstate, you see enough to know that it is not boom times. I also think it is also telling that the people spending the most on advertising in these areas are churches and Adult Toy stores. The recovery is not only the slowest in history it is occurring almost entirely inside city limits of the biggest towns and along the coastal areas.
Sam Zell had some remarks about the economy as well at a forum in New York last week. Before the panel turned into a combination of protestors and a pretty bizarre conversation about Chinese sex lives and birth rates, Mr. Zell observed that “Our whole world was built based on the assumption the pie would grow. Nobody has come up with a solution as to where that growth will come from.” Earlier this year he suggested that the most important question when considering investment right now is “ Where is the demand coming from?” Right now, in many areas that can be a tough question to answer.
Community banks and lots of cash remain the investment of choice right now.
Have a great week everyone
Economic and Monetary Policy has been great for the Stock Market and Big Cities but large parts of the US Still Have the https://www.youtube.com/watch?v=fbEstJ98TcM
At the beach last weekend we hit Gene’s Book Store as we always do when in Sanibel. If you get down to the island do not skip the bookstore. Great people and a truly impressive inventory. While there I found a book titled Baseball Dads by Matthew Hiley that looked intriguing. The dedication page quotes HL Mencken when he said “Every normal man must be tempted, at times, to spit on his hands, hoist the black flag, and begin slitting throats.” The book stay true to the theme all the way though and it is one of the funnies books I have read in a long time. Think Carl Hiassen combined with Christopher Moore and a touch of Sam Peckinpah thrown is for good measure. Not politically correct but you will laugh out loud a few times.