Island economics, arbitrage and green markers

We have been down in the Keys this week in Islamorada. Once upon a time my favorite place on the planet was Key West but as I have mellowed some with age that spot has shifted a bit north to Islamorada. It is gorgeous here and if we choose to get a little rowdy there’s still plenty of spots to do that when the mood strikes. In fact as it is our last night here for this trip I can see a trip to the Zane Grey Grill sunset at Lorelei’s and Hog Heaven late night in my future. Or maybe we will just down rumrunners at the Holiday Isle Tiki bar since it is on our hotel grounds. So may choices so little time!

Anytime I drive and travel around the country I like to take collect anecdotal evidence about the world and the economy that might help us make some money. This trip down we were looking at property as it is not going to be too terribly much longer before I decide I need to live here and visit other places. What we found is a real estate market that still has a few foreclosure and distressed sales but has improved since 2010. Back then it seemed that every house in the Keys was for sale and most of them were distressed sales. In hindsight we should have jumped on one of those bargains but I had not yet even convinced the wife of the merits of Florida yet. Since then I have knocked about 900 miles off the move and just need to tack on another 300 or so to land in our eventual destination. There is a lot of inventory and most of it is reasonably priced.

The commercial sites are filling back up. I am not sure why anyone would think the Keys need another boutique or sea shell shop but there are a lot less vacancies than the last few trips down this way. There are still some empty commercial buildings and store fronts but they seem to be getting filled with new little shops and cafes that will doubtlessly go broke in a few years to be replaced by another starry eyed potential business owner. Business is better that it was a few years all the way around Hotels are busy with lots of no vacancy signs as we drove down and there is some development going on for the first time in years.

Restaurants are busy but not jammed to capacity. We have not had more than a 10 minute wait anywhere in spate of the fact that only at Lazy Daze did we bother to make reservations. As an aside if you are headed this way this beachfront dining spot needs to be on your must go list. The popular well know bars are full but not to the “cant get to the bar, line at the women’s room “level I have seen before. Our favorite smaller, lesser known joints are seeing steady business but you can still get a seat at the bar most nights.

The economy is much better than it was but it is not boom times either. About half the fishing and diving fleet is going out each day at the marinas right around our resort. We had breakfast at Bud and Marys Marina this morning and it looked like half the boats were still at the dock on a gorgeous day. The same holds true for the Holiday Isle Marina and Whale Harbor. Traffic is rarely slow in a place with one lane in and one lane out but it has only been horrid on Sunday night as the Miami contingent headed back up the keys for the work week.

I am always reminded of the trade of the decade n small banks when I came down to the Keys. There are branches of Capital Bank Financial (CBF) down here. After valuations and eroding loan portfolios had pushed me entirely out of banks on late 2006 this was one of the first banks I was involved with. A group of bankers and investment bankers formed CBF and raised more than $900 million in 2009 at almost the low point of the crisis and market. They bought a bunch of smaller banks including TIB, the then parent of The Islamorada Bank. As I looked at the banks they were buying sand the price being paid it was clear that the negativity surrounding banks was so bad that the 4 target banks were at an enormous discount to the offer. I bought all four pieces and earned arbitrage profits of over 25% and backed into Capital Bank at a very cheap price.

It is not quite as easy as shooting fish in a barrel as the Capital Bank situation but the trade of the decade is still available as a source of huge gains. The sector is improving and M&A show signs of accelerating. It is worth noting that these banks are way off the radar screens of Wall Street and hedge funds so the takeover offers do tend to create arbitrage opportunities with sufficient spreads for decent unlevered returns. Tracking deal offers and terms then comparing them to current trading levels of target banks could allow nimble traders with sufficient risk arb knowledge to collect some large sums of cash over the years ahead. If you do not have risk arb knowledge please read the books on the subject by Keith Moore and Guy Wyser Pratt before you even think about putting on trades.

One final thought before I head back out to the beach. Last night as I sat on the balcony having a glass of wine I could see off on the horizon at about 11:00 a flashing green maker that guided vessels on their way out to see. That’s the last marker before you clear the reef and are off to sea on whatever journey or adventure you are undertaking. Once you clear that marker you can go anywhere you want but you better know what you are doing, how to navigate and how to steer the ship.

The financial markets are a lot like that. They can take you anywhere you want to go but you better know how to operate the ship and most importantly how to navigate. The whole purpose of Deep Value and Banking on Profits is to help you navigate the troubled waters of the market and find the path that takes you to your financial goals and investment goals.

Posted to The Tim Melvin Deep Value L… on Mar 26, 2015 — 12:03 PM
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