This weeks epistle shall be a little shorter than normal as I have spent a big part of the week recovering from what I assume was a reaction to a combination whooping cough/Tetanus vaccination booster my Doc insisted I needed. I am not anti vaccine by any stretch but I really would have preferred not to be the 1 in million or so who gets chills and fever from the shot. On the upside there have been no signs of whooping cough or lock jaw so I have that going for me.

This past weekend I was asked what I really think of current market conditions. That’s is not a question I usually answer as I prefer my actions be dictated by the number of securities I can find that meet my definition of safe and cheap. Right now if you look at our two buckets of money the Dep value Portfolio is heavily in cash while the Community Bank portfolio is fully invested in small banks. There simply are not a lot of cheap stocks and that is usually a sign of a market closer to the top than to the bottom.

Once or twice a year I actually answer the question and this time I did. It is really very simple. We seven years into a bull market. We passed the average age of a bull market a long time ago and this bull is getting awfully white around the muzzle. On top of that you simply cannot argue that the stock market is cheap. If you bend the numbers enough you might be able to make a rational argument that it is fairly valued but it would take a great deal of bending indeed.

The current PE ratio of the S&P 500 is 22 according to my trusty edition of Barrons and it doesn’t get better when you use the estimates either. According to FactSet the current forward multiple is 15.1 which is above both the 5 and 120 year average multiple. To make matters worse all ten major sectors have seen earnings estimate decreases since the beginning of the year so you have a premium multiple on a falling number. The research service noted that “In terms of estimate revisions for companies in the S&P 500, analysts have made higher cuts than average to earnings estimates for Q1 2016 to date. On a per-share basis, estimated earnings for the first quarter have fallen by 8.8% to date. This percentage decline is already larger than the trailing 5-year average (-4.0%) and trailing 10-year average (-5.3%) for an entire quarter.” Simply put stocks are not cheap. Even though the Russell200 has fallen more than the S&P the PE of companies that have positive earnings is still near the 20 mark.

We have seen prices rise a lot from the bottoms of 2009 and we may have to see prices fall a lot to create the type of market that would look like one of Charlie Mungers extraordinary opportunities. The economy is just muddling along in better nut not good mode so we are unlikely to get an earnings surge that brings valuations closer to levels that could be considered cheap. Geopolitical risks are substantial and it is just not a great time to be a road buyer of stocks.

My own research has shown that we deep value types make most of our money during the first few years after a bear market bottom when values are abundant and then begin to match and eventually lag the market. We should probably be more in cash as a bull market ages to improve overall long term returns. We did some buying in the recent sell off and that has worked out pretty well so far but today with the Dow moving back into the black for 2016 I am more interested in finding sell candidates to raise my cash levels. Community banks, of course, remain the exception. Here we are still enthusiastic buyers of anything that meets my guidelines.

Politics has been the flavor of the day and for a political junkie like me this is the best thing since I saw It’s a Mad, Mad World for the first time. We have a little bit of everything in this race and if you watched the media and listened to Party Pundits on both sides Donald Trump is the most hated man in America. The most hated man currently has a very comfortable delegate lead. On the other side Bernie Sanders is doing far better than an avowed socialist whose entire platform is based on raising taxes, punish Wall Street and pass out free stuff should be doing. The most unliked by his colleagues Senator of our time is presented a consensus builder who alone can stop the Trumpian Challenge and Hillary continues to run on her track record, most of which consists of being Bills wife. I feel t times like Nero in search of a fiddle and a wine goblet and think that we may finally and absolutely see HL Mencken proved right when he said that ““As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart's desire at last and the White House will be adorned by a downright moron.” The 2016 election shenanigans are fun to watch but no matter who wins I am not so sure how much the aftermath of it all will be.

I always make it a point to nap through Fed Announcements but this week I took it to an extreme as I was deep asleep with fevered reams for the better part of yesterday and had to rely on other observers to report the day. The Feds announcement that conditions are so sluggish there will only be 2 and not 4 cuts this year was greeted with the usual misguided rally. This is like Junkies cheering a better grade of heroin coming to the streets. Bad news may be good news but if it becomes bad enough we may finally see the market pull back in meaningful manner. I don’t usually think of Jim Cramer as an economist but he nailed on his piece on the Fed when he said the Fed pulled back because “I think that this holiday season was all about the digital economy. It became really clear that the digital economy, coupled with the new nightmare of globalization, is producing a lower standard of living, further compromised by both higher health care costs mandated for all but the indigent by the federal government, and a relentless spiral in rents from a critical housing shortage.”

The only things I see worth considering at this level are small banks and a few selected small REITs. Event there you are probably best served by waiting for down days to be a buyer. I would rather miss a trade than buy the top in a given stock. The bull case is that things are not going well enough for the fed to raise rates very much. From my perch that’s a special kind of foolishness.

Have a great week

Tim

Unabashed bulls are looking more and more like

https://www.youtube.com/watch?v=VRsgEXvBuOg