European Stress ,National Budgets, and Sound Advice From Wicked Wilson Pickett

All our troubles seem so far away. All the fears and concerns that drove the little sell off in the market have dissipated and once again we are flirting with new all-time highs in the S&P 500. While there was a whiff of concern about the ending of QE bond buying that has been blown away by the nice GDP print this morning. The next big fear point will be next Tuesdays election but I can’t imagine something less important that choosing which set of corporate allegiances and special interest representatives we send back to Washington and the various state houses around the country. The last few decades have taught us, if nothing else, that the unelected bureaucrats have far more market impact than who sits in the big chairs. Rather than R or D the best bet may be to pull the G lever that continues gridlock and keep government somewhat impotent. We will hear some punditry as the day draws closer but I don’t expect any serious market implications.

The Eurozone bank stress tests are behind us and all off our European Banks passed save on. Even that one that failed has already raised most of the capital needed and will just have to raise a relatively paltry sum of money to be compliant. Naturally they have fallen in the wake of the good news. Someone forgot to put the media muzzle on European Banking Authority Chairman Andrea Enria who sparked a Euro bank selloff when he said “There is always a tendency to see the stress test as a kind of end of the world scenario then nothing more needs to be done. The story is not over, even for the banks that passed.” After hearing what David Einhorn said last week at the Robin Hood conference in New York I am more excited than ever about our Greek Bank stock positions. Of course they are currently leading the way lower as the Greek markets are being like a unruly child (back in the 1950s of course when such vile things as spankings were socially acceptable) child right now.

Speaking of brutal beatings there is a temptation to take delivery of my mining shares and put the certificates in an envelope marked : Do Not Open Until 2019. These issues have gotten hammered as metal prices continue to be weak. We have mostly well financed silver, coal, copper and other miners than I am pretty sure will survive and eventually trade a lot higher. Right now that is the same as saying that all four broken limbs will heal and be even stronger in the future. Its nice to know but that doesn’t stop the short term pain and suffering. Eventually marginal producers will drop by the wayside, the survivors will cut production and we will see profitability return and drive our stocks higher. It is just going to take a while. Thankfully we have kept potions sizes very small and it doesn’t hurt as much as it does if I was brave enough to have the courage of my convictions and back up the truck. . Fortunately I am a quantitative chicken and have a tendency to move slow and stay small.

The community banks continue to be my source of solace and the performance covers many of my sins and mistakes. We are seeing solid earnings report so far with higher book values and reduced problem loan pretty much across the board. One of our ten tiny banks decided it didn’t wasn’t to be out of the game just yet. The price was inching up close to book value so they grew book by about 20% and are now cheap again. Of course having 7 takeovers in the portfolio at an average premium of more than 40% to the previous close makes for a nice financial Band-Aid. The banks are doing well , dividends are being raised, buybacks are being announced the stocks are slowly moving higher and I expect the pace of M&A activity to continue to accelerate so this remains my favorite place to put money to work right now. If you some help finding the safe and cheap bank stocks that power the Trade of the Decade click here.

There continues to be a lot of discussion about where oil prices will go. I have heard back to $140 and as low as $50 in recent weeks. Before we get all caught up in the discussion let’s look at the break-even points various oil producers have in their National Budget:

Saudi Arabia -$83

Russia- $100

Iran $135

Iraq $126

Nigeria $144

Kuwait $60

Qatar $68

UAE $64

Venezuela $120

While clearly some Arab nations can survive at low oil prices they are going to eventually find themselves facing some formidable political rivals in the form of Iran, Iraq and Russia. In spite of the cheerleading about lower gas prices the US has a vested interest in oil above $80 a barrel as well. We are now the largest producer and we lose jobs in a big way at lower prices. I suspect we see prices begin to trade between the Saudis $83 and Russia’s $100 a barrel and that will be good news for US oil and gas companies in the shale fields and Gulf of Mexico. Some of the international drillers look very cheap as well right now.

The market rise of the past five years find us with a portfolio that is energy and resources stocks heavy and lots of cash. I like where we are and when we start to see stronger growth around the world we have a lot of stocks that can make huge 3- 5 year moves. To find these cheap stocks with the potential for market beating long term returns click here. Of course the largest part of my portfolio makeup is community banks and that has lead to solid returns, low volatility and peaceful afternoon naps.

. It takes patience to wait for declines but the most recent one gave us a few new buys in Europe and a couple here at home that fell to our preferred levels of safe and cheap. We will stay the course comfortable with assumption that valuation, patience and discipline have always rewarded us in the past and should continue to do so in the future. Now if I can just find a way to endure that darkness of the next 105 days until pitchers and catchers report!

Cheers

Tim

Song of the week

Value works and it works well over time. Don’t’ 

https://www.youtube.com/watch?v=t82Glf_9W48&list=P...

Posted to The Tim Melvin Deep Value L… on Oct 30, 2014 — 4:10 PM
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