It is just not a good time to be aggressively buying stocks. We can talk about low interest rates and buybacks until the cows come home but somethings are just obvious. You don’t spit into the wind, you don’t pull on Supermans cape and you don’t buy stocks at more than 20 times earnings and several times book value in a slow growth economy. The upside is very limited and there would appear to be plenty of downside. In his recent mid-year update Henry McVey of KKR (KKR) said “At the risk of being labeled Master of the Obvious, today’s macro backdrop , which includes high P/E ratios on stocks and low yields on bonds , appears an extremely challenging one for investors looking for outsized returns in public markets.” The update also addressed rising risk saying “As such, we think that the greatest near-term risk to the global capital markets would be some form of unexpected shock. Beyond mounting geopolitical risks, our base case is that any major shock to the system this year would likely come from excessive debt creation and/or debt levels.” I agree completely. Put it all together and it’s a lousy time to be an aggressive buyer of stocks.

My mantra for some time has been cash, community banks and special situations and I am sticking with that. I am not issuing some sort of sell signal nor have I sold anything from the portfolios lately. Sell decisions are still going be based on careful examination of the fundamentals and valuation of each underlying company. I may be the worst market timer in the industry of markets so don’t rush to sell just because it’s a lousy time to buy. Sometimes the right thing to do is nothing and this is such a time. We are still in a bull market but it is a really old bull.

Holding cash in this environment can be frustrating but once again I find myself in agreement with Mr. McVey who said in his report that “In our humble opinion, when volatility is increasing and correlations are doing funny things, there is no substitute for Cash as an asset class.” It may not be earning much but it won’t go down if equity and credit markets stage a steep decline either. Most of us are not institutions with a mandate to be fully invested so holding a little cash make a lot of sense right now. We hold a lot of cash in our portfolios and will continue to do so until we get much better pricing and opportunity.

I was just interrupted for about an hour by an old friend who was kind enough to call and give me an excuse for turning off the highly partisan dogmatic drivel that is the hearing with FBI Director Comely. I will leave my opinion on the whole mess out of it but both sides simply made political talking points out of the hearing with no real objective reached or purpose served. It was a great example of what is wrong with politics in America today. No independent thought allowed and never go off the script no matter how stupid that script may be.

This may be the weirdest election cycle of my lifetime. Every time I listen to the candidates and the media covering them my overriding thought is “With 322 million people this is the best 2 we could deliver for the highest office in the land?” From an investors point of view the best possible realistic ( I think the best outcome for the economy and markets would be a Gary Johnson victory but I don’t see it happening) outcome is Trump in the White House, the Democrats holding the Senate and the GOP holding the House. This guarantees true gridlock and not much will get done which is very good for the markets. Second best is Hillary in the White House and the GOP holding both houses of Congress which should also lead to a great deal of gridlock. Both scenarios are also an economic bonanza for political cartoonists and late night talk show hosts.

That aside my friend is one of the best bank stock investors I have ever known and was head trader at the little brokerage firm I worked for years ago. Much of what I know about banks I learned from him. We talked about the current environment for banks and the challenges presented by low rates, rising technology costs and the harsh regulatory environment. We both continue to think that this is a huge opportunity as the new world of lower for longer is going to push banks that were willing to give it a go to consider selling their bank.

Because they are relatively illiquid and not impacted too much by broad market events or geopolitical I don’t view community banks the way I do the broader market. Here you can be a buyer of the stocks on my buy list and buy rated bonus picks. If you find a bank with strong balnce sheet and solid loan portfolio trading at 90% or less of book value that has activist or bank stock specialists as a shareholder you should be a buyer of the shares. Quit worrying about when the new Apple (AAPL) iPhone is coming out and how many Teslas (TSLA) have been ordered and may actually be delivered someday and focus on ne of the most powerful and long lasting trends in the US markets. If you have the right mind set and a healthy dose of patience you will make far more money from illiquid little banks than you ever will trying to time and trade the big growth stocks. If you use the proper metrics to value the bank and determine an adequate margin of safety you will also be taking far less risk.

It is a complicated world. As Charlie Munger once said “Anybody who is intelligent who is not confused doesn’t understand the situation very well. If you find it puzzling, your brain is working correctly.” You can buy community banks at the right price and a handful of select special situations but the best overall course is not much of anything at all. Cash is your very best friend right now.

Tim

When it comes to the stock market right now it might be best to emulate Mr. Coltrane and be a

https://www.youtube.com/watch?v=EH6fYkyGUDo