Korean Powder Keg, Morons With Margin, And Red Wine

All the buzz today is about the bull market's birthday and a million reasons it will go higher from here. David Tepper yesterday said that while the market is not cheap, it is hard to sell in front of the economic optimism. He pointed to Central Banks accommodating stance as the biggest reason or stocks to go higher. He told CNBC, "Listen, it's hard to go short when you still have the drugs being given. The punch bowl's still full." Tepper has been more right than just about anyone else in the past few years, so you have to give a certain amount of weight to his viewpoint.

Other discussions are about Trump policies, and Fed moves and no one is paying much attention to what could be the biggest market mover of them all.

North Korea is sabre rattling again. The country fired four missiles into the Sea of Japan this week in response to U.S. and South Korean military exercises in the region as well as the initial installation of the Terminal High Altitude Area Defense (THAAD).

China also opposes the system, calling it an attempt by the US to meddle in Asian affairs. They asked the US to stop or at least modify their military exercises in exchange for putting pressure on North Korea to halt its missile program. The U.S rejected the proposal, with U.S. Ambassador Niki Haley saying, “We have to see some sort of positive action taken by North Korea before we can ever take them seriously.” She added that all options are on the table when it comes to dealing with North Korea.

We are playing chicken with a crazy man who thinks he is untouchable. The country's leader has gotten away with his insanity for so long that he expects everyone to back down and let him go his own way on the world stage. I do not think the Trump Administration will let that play out in the same fashion as in years past. One itchy trigger finger can turn the Korean peninsula into a hot mess. The last time I checked, the markets are not a big fan of hot messes. I am much more concerned about Korea that I am what the Fed might do this month.

As I watch the investing public return to the market gobbling up ETFs and Index funds, I am reminded of the words of Hetty Green. She once opined that, “More money is made in the end by an over-supply of caution than by indiscriminate recklessness.”

I think this is a fantastic time for an over-supply of caution. I hedged off my risk in my bank portfolio for the first time since 2007 recently and am actively looking to cut my exposure in some areas. There are some stocks that I would buy if I didn’t already own them, but there is not a lot new hitting my radar screen. I am avoiding stocks that are in the major indexes and ETFs like I avoid cheap liquor and well-done steaks. The possibility of indiscriminate selling from ETFs in a market sell off is terrifying when you think about and consider the possibilities. This is especially true of the some of the smaller ETFs that focus on a particular segment of the market or seek to exploit some them or another.

Charlie Munger addressed this possibility at the Daily Journal meeting a few weeks ago. He warned that, “If you buy a small index, and it gets popular, you have a self-defeating situation. When the nifty-fifty were the rage, JPMorgan Chase & Co. JPM talked everybody into buying just 50 stocks. And they didn’t care what the price was; they just bought those 50 stocks. Of course in due time, their own buying forced those 50 stocks up to 60 times earnings. Where upon it broke and everything went down by about two-thirds quite fast. In other words, if you get too much faddishness in one sector or one narrow index, of course, you can get catastrophic changes like they had with the nifty-fifty in that former era.”

There are ETFs today that buy stocks based on companies' compliance with the Americans with Disabilities Act, indexes of eco-friendly companies, companies that are buying back stock, companies in the marijuana business, and a whole bunch of other ideas. Of course, you can buy an ETF that tracks just about every sector of the market and every region of the world. In a bad market, the indiscriminate selling of these funds could be dramatic and ugly. If you are not thinking about this as you go about the business of investing your hard earned funds, you should be.

A group of community bankers, including the CEO of one of my holdings, are heading to the White House today to talk regulations with Donald Trump. The White House is receptive to the idea of reduced regulations for smaller banks. Ahead of the meeting a White House official told Reuters, “The type of regulation that you need for a $700 million bank, and the risks they present are very different than those for a $200 billion bank or a $1 trillion bank. Right now we have a lot of these rules that apply one-size-fits-all. And if you're the small community bank trying to comply with rules that are also applied to much larger institutions, it's very hard to remain competitive."

The outlook for these banks remains positive. The reason I hedged my banks is that they have moved up rapidly since the election and there is more hot money in the sector than I have seen in a long time. Hot money leaves as quickly as it enters and widespread selling in community banks could hammer some of the little banks' stock prices. I don’t want to sell any of my banks, but neither do I want to take a short term beating from a bunch of morons equipped with stock charts, margin accounts, and sell buttons. Hedging costs were cheap, so I added a whole bunch of sleep good to my trade of the decade portfolio. That will last until early 2018.

The March new release calendar from major publishers is providing plenty of recreational reading opportunities. It is like a second Christmas for me. The one I just finished and highly recommend is The Last Paradise by Antonio Garrido. It's a thought-provoking and entertaining look at the early days of the Soviet Union through the eyes of an American who fled to the USSR in search of the socialist dream only to find a communist nightmare.

I also finished Most Dangerous Place, the newest Jack Swytek novel by James Grippando and burned through the first three books in another series by Lawrence De Maria. Although the Jake Scarne series remains my favorite, the new Cole Sudden trilogy is a fun read as well and goes great with preseason baseball and pinot noir.

Speaking of baseball, the World Baseball Classic has made for some compelling, if anxiety-inducing, story lines so far. Israel’s sweep in beating traditional favorites like Korea, Taipei, and the Netherlands is just feel good TV. The U.S. team kicks off tomorrow night, and Jim Leyland has made it clear he expects his team to finally bring the Classic trophy home. They seem to have the team to do it this time. Between the Classic and Oriole Pre-season games, I am almost if mid-season form!