Friday Addition Edition

I heard it again this morning. Paying attention to valuation doesn't matter anymore. There is so much cash and so many new traders in the markets. The stock market is just going to keep going higher for the foreseeable future.

Nothing matters but price movement.

The pandemic is over, and it's time to party.

Even as prices are rising, traders buy into Jay Powell's idea that this is all temporary due to supply chain disruptions and other interim measures. The trillions of dollars that have been pumped into the economy by the Fed and Congress have nothing whatsoever to do with all this.

Even the bond markets are buying it right now. The 2- and the 10-year yield curve is retreating after a short-lived bounce. 10Year yield is up a bit today, but it is still just 1.53%.

The vaunted bond market vigilantes of my youth have rident off into the sunset, and either we are living in a brave new world, or the vigilantes will return to do their worst at some point.

The last time high yield credit spreads were this low was back in 2007. No one thought risk still existed back then either. The lowest spread of the previous decade before today was in December of 2019.

I am not saying that High yield spreads are predicting anything specific. All they did was tell us that things were too complacent for something not to go wrong.

Am I suggesting you should sell everything and hide in cash?

No.

Throw it all into gold?

No. Although there is some evidence from Verdad Associates that using a 200-day MA-based trend following approach to gold when conditions resembling the current environment are in place has worked pretty well.

Gold is back below that level right now, so you would currently be flat gold using their rules.

This could continue for a while.

I am saying that I am not so sure I would be buying an index fund or committing to large-cap well-known growth names. It has been a hell of a run, and we could still see something of a melt-up in the market, but this a time for a cautious approach, not a petal to the metal, hair blowing in the wind approach to stocks.

If you own them, ride them. If you don't, it's a good time to step aside.

What does all this mean for small bank investors?

Not much at all, really.

As long as we get the credit and equity sides right and continue to be strict about the prices we pay for our banks, it's hard for us to sustain permanent damage. If we fail to be vigilant about these things, we will be in trouble, but I have easily resisted temptation so far.

We know small bank M&A is just getting started, and I think we see a bunch more deals as we go through the second half of the year.

Markets like this are made for special situations as well. Pay attention to corporate events like spinoffs and mergers. CEO changes and insider buying can provide valuable clues here as well.

The more adventurous might find ways to profit from the expiration of IP lockups. We have seen some stunning declines when insider shares came up available for sale post IPO this year.

The SPAC arbitrage trade I explained to you earlier in the year is looking for every attractive as more SPACS trade below trust value.

The thrift conversion trade is going to heat up as the year progresses as well. I currently show ten first conversion deals of a standard or the second step variety in some stage of the offering process.

I usually keep my mouth shut on macro stuff, but I hear some of the pure idiocy about how the market has changed forever. There is no reason for stocks to go down when we can see signs of inflation, employment recovery is nowhere near expectations, and high-risk assets are priced like high-grade bonds, and it is time to point out that caution should be part of your arsenal.

You cannot outperform the market if you do the same things everyone else does and think the same as everyone else does

Posted to Banking on Profit on Jun 25, 2021 — 3:06 PM
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