It was just another week in the markets. Stocks are up, bonds are down a bit, gold is down and anything that provides energy is just getting smoked. The economy is muddling along and earnings have been decent so far this season. There is certainly no reason for any sort of panic but not much to celebrate either. We are still very much in a central bank dominated world when it comes to investing. There is no way the Fed can raise rates anytime soon in my opinion so if I had Doug Kass’ proverbial gun to my head I would say we just keep marching along to the tune of the Zero Interest rate Band. Of course before I would ever back up my opinion with actual cash I would have them go ahead and pull the trigger because based on my record of broad market prognostication the results would be pretty similar.

The energy related holdings are getting crushed right now and along with just about every other value investor on the planet I am getting crushed in those names. Since we keep position sizes small and hold a lot of cash it is not a crushing blow but it still stings a little. We have seen some breath taking drops on these names in recent weeks but I remain highly confident in energy usage and pricing in the future. Its some short term pain but the long term should be fine.

Josh Harris the co-founder of Apollo Global Management (ARO) described the private equity mindset needed when considering energy investments right now. On a recent conference call he said “"In the short term, the price of oil is difficult to predict and it certainly has the ability to detach from long-term fundamentals. Even at these lower prices, we believe energy is a very interesting place to be investing capital. And we're tactically working to take advantage of the market dislocation." He also talked about oil pricing and has views not dissimilar form my own saying “When you look at the fundamentals of energy, and you really look through the sort of trading trends, what you see is that the supply curve where oil is economic is very, very flat at around $80. And so therefore, if the price of oil were to drop for an extended period of time below $80, you would see -- ultimately that would drop supply in the marketplace. And therefore while the price of oil can go down below $80 for some period of time, of course, and even some moderate period of time, if you're looking over a five-year period, our longer term period to how we gauge our investments, it's likely to be that price or above

The pain of energy is also being greatly absorbed by all the good news in out small banks stocks. Earnings shave been fantastic for the stocks in our portfolio with better credit conditions driving solid earnings growth. Loan demand for mortgages is still pretty low and the competitive nature of that marketplace right now is a drag on lending but we are seeing some nice increases in demand for commercial lending. Insiders are buying and the 13fs being filed show that the activists and value types are becoming more heavily involved in these stocks. We are seeing dividend increases and buybacks announcements in many of our banks and the performance of this portion of the portfolio offsets any pain from the energy sector. As a bonus the Value Income portfolio holds Susquehanna Bancshares which shot up by more than 30% when BB&T announced they were buying the Mid-Atlantic bank. That’s the 8^th bank takeover we have been involved in in the past year.

If you aren’t in the little banks you should be. You can do it yourself with all the info in the monthly Bank Letter or join the more in-depth Banking on Profits which includes trade alerts and portfolio guidance. End of commercial.

Very soon we will see the prediction floodgates open and everyone will, with great confidence offer up their forecast for 2015. Pundits will give very specific forecasts for stocks, bonds and commodities. They will tell us how geopolitical and economic events will play out over the next year. They will be precise and confident. They will be wrong. As John Kenneth Galbraith once remarked financial forecasting exists primarily to make astrologers look good. If I told you last year that we would have war in the Ukraine, a negative 4% GDP print in the first quarter, economic weakness in Europe, slowing demand from China, an emerging Caliphate in the mid-east, oil price drops along with increase in the cost of beef, coffee, pork and cocoa in the year and a lack of strength in housing how would you have predicted 2014 forth markets. Would you have guessed it right? Yeah, me neither.

Market forecasting and prediction is a waste of time. If someone tells you that they know what the market is going to do and can make you money predicting stock and bond prices, take a deep breathe, kick them somewhere sensitive and remove yourself from the scene. Every once in a while someone makes a lucky guess and  immediately and with great fanfare are anointed Wall Street’s newest genius. They spend the next several years losing a ton of money for people unfortunate enough to fall for the pitch.

Ignore predictions and don’t try to make them yourself. Focus on value, insist on a margin of safety and be patient. That recipe should help your outperform most investors and professional manger over time.

Have a great week all. Cheers!

Tim

Song of the week

As a value investor https://www.youtube.com/watch?v=PHVeyo4W18U