Low And Slow, Prudent Buyers And Barefootin

We continue to see a mixed bag in the U.S. economy. For every good number or comment we see a negative development or commentary.

For instance Jamie Dimon was pretty upbeat about the U.S. economy recently, saying “"What we see is a strong consumer. Asset prices are up, 13 million more people are working, wages are going up, household spending is up.”

On the other had Bill Gross said to sell all stocks and bonds because QE is not working. He said in his latest outlook “The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund. Without the latter, a credit-based economy ultimately devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth. In the U.S. four percent is necessary, in Euroland 3-4%, in Japan 2-3%.”

Dimon thinks we can get there, saying “"If the next president focuses on the right things, I think we're going to four percent. Those right things are proper immigration reform, proper infrastructure spending. The Democrats say spend a lot of money. I kind of agree with that. The Republicans say it shouldn't be bridges to nowhere, big pork barrel [projects]. I agree with that."

Of course he is betting on what, I think, may well be the two worst choices for President in my lifetime--if not in history--so that argument breaks down a little.

Who is right ? I have no clue but fall closer to the Bill Gross point of view than the more optimistic one expressed by Mr. Dimon. I think he will eventually be right as the spirt of entrepreneurship and innovation that has always driven the U.S. economy will eventually prevail, but we have a lot of economic and political hurdles to jump before we get there.

I think we have to think like Joshua Harris outlined on the Apollo Global call last week. He told investors, “I think we all need to just be accustomed to the fact that we could be in the zero rate environment for a prolonged period of time. I think a lot of that is going to depend on kind of how the economy itself does, and that is unpredictable. But I think you have to go into this kind of being cautious and try to find ways to deploy capital."

The other problem for us as investors right now is that valuations are simply too high in many assets to justify being an aggressive buyer. We are finding opportunities in community banks and, on the income side, closed-end funds and business development companies associated with major private equity firms. But beyond a handful of special situations that I think have the potential to triple or more in the next few years like Volt Information Sciences, Inc. VISI and Unisys Corporation UIS, I am comfortable sitting on my hands and doing nothing. I am still not a seller, but I am definitely not a buyer of most equities right now either.

One benefit of all that free time is I can keep up on my reading and right now that means a lot of conference call transcripts. As the piece I sent out last week reported, one of the big takeaways is that community banks are preparing for a huge expansion in M&A activity. The list of sound bites I sent tells me that everyone is catching on to two important facts about the banking industry right now. First, you must grow the bank to keep your investor base satisfied. Second, the easiest way to grow the bank is via intelligent M&A. 

I have also listened to a lot of REIT calls. Basically, right now it’s a great time to be an owner of commercial real estate, but a touch of prudence needs to be applied as a buyer. There are overheated segments and markets right now. REITs have outperformed the S&P 500 over every imaginable time frame and do much better then stock in bad markets, but we need to be careful buyers right now. I am also tracking some REIT-focused closed end funds that may give us a way to back into the sector on the cheap.

Economy is slow, stocks are rich. Might be a good time to buy a bunch of little banks and head to the beach.  

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