A friend remarked the other night that I seemed almost bearish on the prospects for the stock market in 2015. Although I never make predictions abut market directions and am always cautious to some degree the conditions I see right now can only be described as alarming- and that was before the Swiss central Bank kicked the world squarely in the butt this morning but removing the curbs on the Swiss franc. I am not going to add my own voice of those who know exactly why the Swiss took this step because I, apparently alone in the world of punditry, do not know their exact reason. It is however safe to say however that the radical move was not made in anticipation of a strong recovery in the global economy in the next few months.

It seems that every day the mantra in the media is that we are the best house in the neighborhood and economists all over the globe are pointing at the US as the best economy in the world. The problem with this is that we appear to have the only house in a tent city. As December moved towards a close we heard talk about the improving job market and I cannot help but wonder what planet these folks analyzing the data live on. I have adult kids in the labor force and they still have horror studies about well qualified friends having a hard time finding work in their field. Looking at wage growth, labor force participation and the U6 numbers reflect a jobs market that is better than it was in 2009 but it is far from robust and wonderful today.

The disconnect between Main Street and Wall street is something we have heard folks like Sam Zell, Bob Rodriguez and Seth Klarman, among others talk about in the past six month or so. Activity on Main Street is better but not great while stock prices are at all-time highs. It is not really that business is so good for US corporations as it is that there is nowhere else to put the money at a decent rate of return and earnings have been boosted by cost cutting and stock buybacks. There are pockets of prosperity but for the most part stocks seem overpriced to me relative to their financial conditions and prospects. This is the common sense portion of my 2015 theme.

I am not going to try to time a market top of get net short or anything of that order. I am still very much a Hetty Green/Andy Beal/Mr. Womack type of investors who reacts to what the market does and eschews predictions. However I am also not going to throw money at the stock market when the only bullish thesis is that rates are low and there’s nowhere else to invest. I have some friends who are all in based on these assumptions and that is frankly a little scary to me. The Main Street/Wall Street disconnect is getting worse every day and is one of the very few things in life that can keep up at night.

The real alarm for me comes for the simple fact that there are very few cheap stocks right now. The returns from my screens are lower than I can ever recall. When I remove the overlap from my 3 favorite safe and cheap stocks screens there are less than ten candidates for purchase. I do not recall ever seeing this few safe and cheap stocks. In 2007 I was complain because I could only find between 15 and 2 stocks using the various filters and screens I employ to find potential bargains. This a severe drought of bargain issues and leads me to believe along with James Montier of GMO that this market is hideously expensive and I don’t need to be fully invested. This of course explains the cash component of my 2015 theme song. Looking at all that lovely cash in the Deep value and International Deep Value funds is like a big ol sweet lullaby that chases some of my late night concerns back into oblivion.

Bringing us, of course, to our favorite part of the theme song. We are already seeing some takeover activity this year a month the small banks. I discussed last weekend in my video how we would handle the banks that are too small to be a part of the regular portfolio. Rather than do future e-books of these tiniest banks I am going to cover them on a subscriber’s only basis with regular Banking on Profits subscribers. I mentioned that I found 122 banks with less than $500 million in assets that are currently trading below book value. A lot of these banks are going to be taken over in the next year. They are not for everyone as they trade by appointment only but they should be. I will be rolling the list of bonus stock picks out tomorrow so if you are not yet a subscriber to the regular banking on profits service here is a chance to sign up at the package price we offered in last weeks seminar.

The nice things about the community bank space is that if the economy is weak this year and we see poor market conditions the pace of mergers will accelerate as M&A will be the only way for the regionals to grow earnings and assets. If I am dead wrong and we have a booming economy and market these will go a lot higher as earnings pick up as a result of improved economic activity. It is pretty close to a true win-win for disciplined investors smart enough not to worry about short term liquidity.

Have a great weekend everyone!

Tim

Song of the week:

Hopefully employing all three C’s of our theme can keep us from going down https://www.youtube.com/watch?v=2z7nAaTr6JQ in 2015