It has been an interesting week for the markets. This time last week all of our stocks were going to zero and most of us were going to die from Ebola very shortly. After a temporary decline yesterday related to possible terrorist activity in Canada all is again right with the world. We all are buying new iPhones and iPads and junk bonds yielding less than 6% with covenant lite provisions are a screaming buy. After being left for dead last week shipping stocks and other beaten up sectors have bounced back in a very big way. If I had to trade this stuff day to day or minute to minute I would be curled up in the corner with a bottle of Rebel Yell Bourbon sucking my thumb.

Fortunately I don’t have to do that and have been able to make the rising volatility work for me and not against me. As Europe weakened over the past few weeks we have been able to pick up shares of world class companies at ridiculous valuations. The sharp decline didn’t really carry fall enough to give us any new domestic opportunities but thanks to small position sizes and lots of cash we didn’t feel much of a sting at all. Some of our energy and resource names have gotten whacked pretty hard but they were all less than 1% positions. We need to see oil find a proper range here to reevaluate fully but I expect we will be buying more energy related names before too terribly much time passes by.

In the community bank section of the portfolio nothing happened. Nobody got Ebola and they were all too busy cashing checks, writing car loans and staying on top of compliance issues to worry about what was happening in Canada or what a particularly talkative fed official had to say. It really is the boring way to make money in the stock market and I continue to be amazed is that everyone prefers getting whipped around by the short term fear and greed cycle when we know from the recent Sterne Agee report that simply buying bank stocks below book value after an activist files a 13D can provide returns of about 2.5 times the market indexes. No charts, no deviations, standard or otherwise, no complicated algorithms. Just buying cheap banks with a catalyst. About 30% of the banks with activists have been subject to a takeover offer with an average first day premium of over 30% and most of the rest have made changes in operations that lifted the stock price high enough to satisfy the agitators. It is simple, it is effective and leaves time for an afternoon nap most days.

Sunday is going to be a huge day for global investors. We have the Brazilian elections and right now its too close to call. Personally I think Brazil needs a change at the top and new direction economically but I don’t get to vote .Not only do I have no clue at this point who will win but I have even less of a clue as to how the market might react to either candidate emerging victorious. Those who short anticipating a Rouseff victory could find themselves scorched by a relief rally. An Aceio win could lead to some unrest and uncertainty that caused another decline. The only way to approach this is to put ourselves in a position to react to events rather than trying out predict outcomes and reactions.

The same holds true for the Eurozone bank stress tests. Those results will be released on Sunday and rumors are flying as to who passed and who did not. I have small positions in French, German and Greek Banks and a slug of cash to buy more if we get some meltdowns as a result of the tests. Loading up on Euro Banks or selling them in advance of the release are just two side of the same coin. If you sell and the results are good on balance it will too hard to get back in. If you load up and they are generally bad you are going to lose your donkey right ricky –tick in the opening moments of Monday Morning trading.

If you are an investor come into next Monday with small longs and excess cash. If you are a trader with a high degree of conviction either way in Europe or Brazil I suggest a puke bag, a seat belt and comfortable shoes. You will need them before the day is over.

Volatility is back. Our best course is to sidestep it with some of our funds by keeping lots of cash and small banks and make it work for us and not against us by snapping up stocks that become too cheap and hold them for a private equity like period of time.

Cheers,

Tim

Song of the Week

Little banks can give you https://www.youtube.com/watch?v=tZQR-o4nO1E