Most of my week has been taken up with travel time and the FIG bank conference. It was not until today that I had a chance to sit down and spend any time with the rest of the news. I finally got around to checking out Carl Icahns video that everyone has apparently been talking about. Mr. Icahn has made negative comments about the market for some time and joins that chorus of Klarman, Tepper, Zeel, Montier and others that have expressed concerns about the valuation of the stock market. At 20 times earnings I do not think you can call the market cheap and the lack of bargains has me as concerned as all the other old guys. I have seen some folks poke fun and write for clicks talking about how silly Carl Icahn’s remarks are but I note some key differences between him and his critics. Carl Icahn has been doing this a lot longer than they have and he is one hell of a lot richer.

Mr. Icahn said in the video that” “I see real tremendous problems ahead and I don’t think we are handling it right and nobody really wants to talk out. We are headed toward a strong correction and possibly a complete meltdown but not systemic like 2008. It won’t threaten the system, it’s just going to threaten your livelihood and net worth.” He said that short term thinking in corporate boardrooms and Washington have pushed up to the edge of a market cliff and said that he had seen it before in years like 1969, 1974, 1979, 1987, and 2000. I find it very hard to disagree with that remark and we will see short term thinking come into all its glory next week when we get into earnings season and all the just plain dumb trading we will see based on the traders guess that his guess about three month earnings will be better or worse than the analysts guess and how the market will react to this combination of guesses. Even worse shareholder cash will be spent to buyback enough stock, even at high valuations, to manage results above the magic number and in some cases people will lose their jobs to make the three month numbers in line or above Wall Street estimates.

Mr. Icahn urged the Fed to get off zero rates as cheap money was making bad decisions possible, He told investors that “"Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers," said Icahn, adding some recent acquisitions have been done at a too high a price. We've been on the boards of a lot of companies in a minority position to convince the boards to stop doing these takeovers and stop purchasing these companies. This is not to say that mergers shouldn't be done."

In a follow up interview with CNBC Mr. Icahn said that he thinks that markets are at dangerous levels and earnings are overstated. He thinks investors have out themselves in a dangerous positions and is particularly worried about income seeking investor’s exposure to junk bonds. That is a concern of mine as well as having lived through two junk bond crashes this market can go no bid quicker than you can blink. He quite correctly pointed out that “If and when there is a real problem in the economy, there’s going to be a rush for the exits and people want to sell those bonds and think they can sell them. “ That is exactly what happens when junk bonds collapse. I have seen several folks talk about junk closed end funds in recent weeks because to the double digit discounts. The last two times we had a full on collapse in junk those discounts were way over 20% and that’s when I may get interested in discounted junk but I have no interest right now.

The two best asset classes right now remain small banks and cash. My trip to the FIG Bank Conference this week just increased my confidence in this sector tremendously. M&A is going to pick up and money is going to be made in a fairly low risk manner. Buying small banks with sound balnce sheets and loan portfolios is like shooting fish in a barrel. When you add an activist investors in an activist shareholder it becomes more like the fish shooting themselves and jumping into the frying pan.

Outside of these little gems I favor cash. We have some cheap stocks and we are holding these but new bargains are hard to find There simply are not enough cheap stocks to justify a full on commitment to the stock market. We have high cash levels in both Deep Value and International Dep Value and that’s not going to change until we see a lot more inventory created by a significant market event.

Have a great week

Tim

When it comes to markets today we might be well advised to invest like Bob Marley and exercise a little