Election Day is now in the rear view mirror and the vote did not go the way the administration might have hoped. The GOP swept control of the Senate and has the largest majority in the House in decades and everyone is celebrating. After all, all this GOP control has to be good for business and the markets right? We should see the war on energy end and all these nasty regulation go away, correct? I don’t know how to break this to your guys but none of that good stuff is going to happen. The GOP has Congress but they do not have control of the White House and they do not have a veto proof majority. They also do not have control of the myriad Federal Agencies that rule by edict and are largely controlled by Mr. Obamas appointees. The GOP is in a position to make things marginally less bad but they won’t be able to push through their agenda. The biggest change coming out of this election is that if you are a news junkie like me there is going to be some terrific high theater news broadcasts for the next two years.

The election results may actually work against a more fiscally conservative, market friendly agenda. At the request of the Democratic Party the President has kept his pen in his pocket but that is highly likely to change in 2015. I suspect that enforcing his vision of the world is important to this President and we will see a flurry of executive orders to enact that which he has no chance of legislating. This is going to be a fierce version of gridlock that is great entertainment and eventually ends up in the courts I suspect. Market participants are premature in celebrating the election. Nothing has really changed.

Paul Singer of Elliott Management is out with a shareholder letter and it is a gold mine of thoughts on the markets and the economy. He sums up the world perfectly in my opinion in the letter when he says” “When markets are trending, they can appear unstoppable. Every sale in a rising market feels like a bad one, and every purchase in a rapidly falling market is punished by losses within minutes or hours. It is so much less painful to go along with the trend than to buck the trend – at least in the short or possibly medium term. Furthermore, in the modern world of super-leverage and group-think, valuations can go far beyond the estimates of every expert and practitioner. That is, of course, until they stop.”

We have heard this from others including Seth Klarman and Sam Zell in recent months. I share their opinion that the economy is better but not good and there is a growing disconnect between Wall Street and Main Street. Mr Elliott is right there with us telling investors in the letter “At present, the situation in developed countries can be characterized as follows. Asset inflation is roaring, but it is sectoral and skewed. Consumer inflation is understated, and thus growth is overstated. Employment data is misleading. This combination of factors means that ordinary citizens are not doing well, but the owners of high-end everything are doing just fine, with few concerns for the middle-class people who know things are not “all right,” but cannot put their finger on why.”

Here is the rub for the moment. While I like the fact that some very smart guys agree with my thoughts the market really does not care what we all think. As long as it has a steady diet of low rates and easing they are happy to just push higher. Keep in mind that even though the Fed has stopped buying new bonds the coupon reinvestment each month is still pretty massive so QE is not really ended. Now Japan is upping its game and no matter how much it drags its heels Europe has to jump into the pool sometime soon. Central banks and low rates are all the market cares about for now and it will stay that way until we get a significant event that pushes sentiment in a different direction.

All we can do for now is look for pockets of value and hold lots of cash to deploy when we see wide spread cheap stock inventory. We have been buyers of some of the oil names as they fell to significant discounts to asset value. I continue to love the little community banks and the unique combination of large profits and a hiding place from market volatility. Small banks earnings are coming in hot and heavy and I feel like a growth stock guy most days as continued credit improvements are driving fantastic earnings growth. M&A activity is picking up in the sector and so far we have had 7 takeovers in the past year with average gains of about 40% each between banking on profits and the Ten Tiny Banks special report. A recent bonus pick I sent for subscribers recently has skyrocketed almost 70% for those who were able to get shares in the minuscule bank. I have no clue why everyone is not buying these grossly undervalued stocks but I guess some just need the illusion that liquidity means safety and constant action. If you are leaning towards taking my suggestion and earning high returns with less volatility click here to get in on the action.

I recently interviewed Michael Devlin the CEO of Cape Bank of New Jersey and he summed up the outlook for smaller banks and M&A activity when told me” Absolutely and I probably see that even for institutions like ours. We will be $1.5 billion, which I think is certainly a viable size for community bank. But, I also think that there’s going to be this push towards consolidation for the next 10-year period of time. I don’t know if that’s a bad sign. As you had mentioned earlier, there are regulatory burdens. We have a few banks in my marketplace that are under $200 million and frankly, I don’t know how they can do that… If you have a staff of 30, you need to have six people that don’t generate income. That can be a real hard thing to do and to make any kind of reasonable return on your equity. I think that there is going to be consolidation and if you are a good CEO, you have to be open to that possibility as a buyer and seller.”

The CEO of Pacific Mercantile Steve Busker also sees good things ahead for community bank stocks ahead. He told me “For the small community banks, I think they will capitulate to consolidation with larger banks. It won’t be the big banks buying them, but there will be a consolidation to the multi-billion dollar smaller banks by the $500 million and less community bank. I think that is a wave. Secondly, the community bank population has shrunk so much that I feel there is a real opportunity for the remaining survivors to fill the niche of what clients really want. I think we’re going to have a very healthy environment for some years.

This is happening and it is going to continue to happen. The only question I see is are you going to make money from the inevitable? If you are leaning towards taking my suggestion and earning high returns with less volatility click here to get in on the action.

In a few weeks I guess the markets focus will shift from the elections results to Holiday shopping results. Much will be made of Black Friday events as shoppers respond like lemmings and moss the joy of the greatest holiday of all. I mean how can you resist day with copious amounts of food and wine with football all day and not one present to buy anyone? It is holiday perfection yet many will flee to the malls. Analysts will track the results and traders will trade them without stopping for a moment to consider that all Black Friday does is bring forward demand at lower margins. I have zero retail exposure right now and suspect that will not change anytime soon.

The markets will do what they will do and with a lot of cash and some cheap stocks we remain in a perfect position to profitably react in Hetty Green like fashion rather than futilely attempting to predict events.

Have a great week all

Cheers

Tim

Song of the week

An aversion to shopping and attention to valuation should help me avoid these of all types

https://www.youtube.com/watch?v=92zMMZWPyGE