The markets continue to get hammered and there is a distinct odor of fear hanging over the markets. We are trying to back bounce this afternoon as investors rush to buy tech as it looked “cheap” to them. I have no idea how you get cheap out of these valuations but traders will trade even if it doesn’t make sense. The fact that the price is down does not mean an issue is cheap but that is a lesson a lot of folks need to learn for themselves.

I wrote the other day that if you are a long term value investor still in the accumulation phase of your life lower prices are more of a cause for champagne rather than concern. I was reading the Carlyle Group (CG) call transcript today and David Rubenstein expressed the right mindset for this market. He told his investors that “We expect a tougher environment over the next few years but it is in this environment that we expect to see the best opportunities. For the past two years we have highlighted the challenge of high asset values and the impact that that has had on our investment phase. We think today and in the near future from a new deal standpoint valuations will be more to our liking.” He blamed the volatility on China, oil and credit market s and said “Taken together these three factors have produced enormous uncertainty across global financial markets. And we believe they will lead to significant volatility for the foreseeable future with the risk tilted to the downside.” Let’s hope he is right as even after buying a super-regional bank below 80% of book this morning we have a lot of cash left.

Speaking of private equity I am starting to get pretty excited about the potential in long term ownership of private equity firms and other alternative asset managers. While prices are being pushed lower by poor current market conditions the current environment is perfect for these long term buyers to begin buying bargain assets. Thomas Barrack of Colony Capital mentioned this at a Tiger 21 meeting in Beverly Hills earlier this week. He told the uber rich folks in attendance that "Those alternative assets are a buy. The market is mistaken in this frothy market that perhaps the fund business is going to suffer. In fact, it’s the opposite.” According to a Bloomberg article he expounded on his position saying that “Investors are nervous about private equity firms, in part, because they don’t understand the holdings. Over time private equity investments outperform stocks. Their advantage is established records of sourcing deals, along with managers who have histories of turning around companies, fixing real estate and understanding credit as traditional banks limit lending.” I think he is spot on right and so do the folks running Apollo (APO),KKR (KKR) and Carlyle (CG) as the all just announced big buybacks to take advantage of compressed valuations. Leon Black of Apollo said that “As a firm, we're continually presented with numerous potential areas to invest capital opportunistically and for strategic growth. And at the current price levels for Apollo shares, we see is significantly undervalued company. So we view share repurchases as an accretive use of our capital.” He described the valuation of his firm as “"an absurdity but an opportunity, clearly, in terms of repurchasing shares".

I agree. All of the big 4 PE firms distribute a ton of cash to their shareholders and even the depressed 4^th quarter distributions make for a very attractive annualized yield. We own several of them in the income portfolio and are looking to add in that portfolio as well as potentially buying in the regular deep value portfolio. All of them are investing in energy markets and that should have an enormous payback sometime in the next5tod 7 years. The prices of the leading PE firms have been blasted and it appears to be a good time to start buying them.

I added to my bank stock holdings today and if prices keep doing this we will add some more. Although we may have reached the zenith of the credit cycle I do not see any sudden deterioration in credit that will destroy bank values in 2016. Some banks may struggle with energy related loans but it’s a pretty short list and we do not own any of them. Earnings could slow but that may well be a bonus for us as it would push both buyers and sellers to accelerate the pace of M&A activity. Current market conditions are perfect for us as we take a long view and we have been able to put orders near and even below market bids and get filled on some less liquid names. I still feel quite certain that 2016 is going to be a fantastic year for small bank stocks and am happy to buy at bargain prices from forced sellers.

We have a big couple of weeks coming up. Speed week at Daytona starts Saturday and I have one of my oldest friends flying in for the 500 and some southern sunshine the following weekend. Spring training starts next weekend and pitchers and catchers report to Sarasota this Thursday. The following Monday position players report and exactly one week form them I will be over at Disney/ESPN taking in my first game of 2016. The spring book release schedule shows me that soon we will have new Randy Wayne White, Ace Adkins, Joe R. Lansdale, Jeffrey Deaver, and Clive Cussler for our recreational reading pleasure. Market are tricky right now but life is good , baseball is coming and the cheaper we can buy quality assets the sooner we can spend most of our days in the bleachers with a cold beer.

Have a great week everyone

Tim

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