New Year’s Eve is upon as last. Before we put 2015 to bed let me urge you all to please stay off the roads tonight. Even if you don’t drink , along with the regular drunks the roads tonight will be full of imbeciles, amateurs, idiots and morons who have no clue they have had too much to drink and think they are “juss find to make those few itty bitty miles home.” I wouldn’t even use the nonprofessional ride sharing services where you have no idea how experienced the driver are. Take a regulated cab, hire a car, take a train, walk whatever it takes to stay safe. It is not a great night to go out in my opinion unless you like wearing other people hors d'oeuvres on your short and the delicious tingle of an Amaretto Sour poured down the neckline of your dress shirt. Myself I always found that cleaning some drunks puke off my car hood the next morning made the night so much more special. I will home with the family drinking wine and watching old moves again this year. It is a much safer idiot free zone. A lot cheaper too.

I will be happy to see Deep Values-10% number roll back to zero tonight and I have big expectations for 2016 in this portfolio. I will, however be deeply saddened to see Banking on Profits stellar 17.7% number spin back to 0 but I am not that worried. I think that M&A accelerates next year and look forward to another stellar year for the community banks stocks again next year. Had you maintained the bank heavy focus I preferred all year with about 70% devoted to the Banking on Profits portfolio it’s been a decent year with a total return 8.75%

Consider some of the remarks made recently about the community bank sector. Mark W. Olson, Chairman of Treliant Risk Advisors and former Federal Reserve Board governor told American Banker magazine “With total bank capital at the highest level in many years and bank earnings continuing to recover, I predict that there will be in excess of 400 unassisted bank mergers in 2016. This will be the highest total of mergers since year 2000.” Richard J. Parsons, former executive at Bank of America and author of Broke: America’s Banking System told the magazine” In at least one quarter of 2016 — and quite possibly the entire year — the industry will see for the first time the number of bank charters shrink on an annualized basis by more than 6%. As a result, investor interest in the banking sector, and most specifically in smaller regionals and larger community banks, will spike to levels not seen since well before the financial crisis.”

Jimmy Dunne, co-founder at Sandler O’Neill & Partners, went on Bloomberg late last week and replied “absolutely” when asked if regional banks’ M&A would continue. Dunne said that conditions were ripe for continued activity and that it was not a case of “I think it is going to happen. It is going to happen”.

“Even with steady capitalization levels, U.S. bank earnings will be challenged next year due to economic headwinds and the strengthening dollar,” said Christopher Wolfe, Managing Director Financial Institutions at Fitch Ratings. “As banks grapple with the cost of regulation and soldier on in the lower-for-longer interest rate environment, banks’ net interest margins and profitability will be pressured, which we expect to lead to M&A in 2016.”

We have a pool of banks that need to sell. We have a pool of banks that must buy. I am pretty good at figuring which is which and in the last two years we have seen almost 20 takeovers in the portfolio and bonus bank stock picks. I think we will have more than that in the next two year. Today is your last chance to get into Banking on Profits for 20% off. Click here and use coupon code BOP23 to get your discount.

Much of 2015 was spent researching studying and testing. We made some interesting discoveries that will help us do even better in the years ahead. Adding momentum factors to deep value characteristics improves performance and reduces drawdowns. Had I used a value portfolio with stocks below book value with my reinterpretation of Gary Antonaccis Dual Momentum the portfolio would have returned about 3%. When the portfolio was assembled last year you would have been small bank and REIT heavy with no energy or resource names.

I also confirmed empirically my anecdotal observation that Deep Value works best after a bear market bottom and then after about 3 years begins to revert and then at about the 5 year market begins to lag. Adding stricter quality factors and/or increasing cash holdings after the 51^st month (historical average) of a bull market can improve returns quite a bit. We also found that as Tobias Carlisle has insisted EV/EBIT is as good and sometimes better measure of value than price to book. It is now in the toolbox.

I am looking for a big 2016. The perfect world would be a big spike in oil that causes a sharp stock market sell off in the first quarter of 2016 so that’s not going to happen. Deep Value has a nice collection of energy stocks, regional banks, discounted closed end funds, REITs and special situations. Of course there is still lots of cash. Banking on Profits buy list has a great collection of sound community banks with solid loan portfolios that trade below book value. Most have an activist or two involved.

It should be a great year with nice numbers and even more learning experiences that will make us all better investors.

Happy New Year

Tim

Have a great New Years. I will home watching old moves and swilling up some

https://www.youtube.com/watch?v=LXbtsCDh-Go&list=PL_Wp8Sgstha92Y7Nfv6KklRpYisNxf6Vu