This week former hedge fund manager Stanley Druckenmiller made some headlines as he compared the current environment to 2004. He said ““I just have the same horrific sense I had back in ’04. Our monetary policy is so much more reckless and so much more aggressively pushing the people in this room and everybody else out the risk curve that we’re doubling down on the same policy that really put us there. I know it’s so tempting to go ahead and make investments and it looks good for today,” he also commented, “but when this thing ends, because we’ve had speculation, we’ve had money building up four to six years in terms of a risk pattern, I think it could end very badly.”

He sounds a bit like Seth Klarman when he compared the market to 2007 telling his investors “It’s not hard to reach the conclusion that so many investors feel good not because things are good but because investors have been seduced into feeling good—otherwise known as “the wealth effect.” We really are far along in re-creating the markets of 2007, which felt great but were deeply unstable when shocks started to pile up. Even Janet Yellen sees “pockets of increasing risk-taking” in the markets, yet she has made clear that she won’t raise rates to fight incipient bubbles. For all of our sakes, we really wish she would.”

Klarman was even more concerned about the push out the risk curve. He said “The pressure to reach for return virtually ensures that many investors will take greater and greater risk for less and less potential reward at market peaks. If you can’t find bonds that yield 8%, better grab those offering 6%. Or 4%. If you need 8% to meet your bogey, then you will be prone to own increasingly risky assets or leverage up the safer ones. These pressures, as much as any indicator, are today signaling danger. Investors today are bidding ever higher amidst frenzied competition to buy pools of non-performing loans, and then leveraging them up to get double-digit returns. Mortgage securities backed by questionable loans issued to dicey borrowers now trade close to par and yield a downright stingy 3-5% where they once yielded a generous 15-20%. A recent brokerage report excitedly touted the new HoldCo PIK Toggle notes of a Croatian consumer goods retailer. Nearly every word of that description is a flashing red light to seasoned investors.”

All scary stuff and for the most part I fully agree with every word both man said. Even if I didn’t agree you have two investors who have achieved enormous success. Klarmans long term returns are around 20% and Druckenmiller is closer to 30%. You have to listen to anyone who has achieved that kind of success. Listening to these two might make you think it is time to close up shops sell everything and hide under the table.

Here is the problem. Druckenmillers remarks were made back in January and Klarmans were made over a year ago. While both expressed concerns neither even made a vague attempt to predict when this would occur. Both are still actively looking for places to put money to work. Acting on predictions and expectations that have unknowable time frames is a fool’s errand. Neither of these men are fools. It may be a time to be cautious but it is not time to close up shop or become short sellers either.

Do I think all this –QE, stimulus and six years of rising stock prices-could end badly? Yes I do. When will it happen? No clue. What will I do in the meantime? Look for safe and cheap stocks to buy and indulge my community bank addiction.

In a Bloomberg interview this week Druckenmiller did he say he likes crude oil here. He told Stephanie Rule that” Well, I’m pretty optimistic on crude prices. I think they’re going to do better than the forward curve. Because as my protégé, Zach Schreiber, said a year ago, the cure for high prices is high prices. Well, he would also say now the cure for low prices is low prices.” He expects that production cutbacks and higher demand will eventually solve the supply issues and prices will push higher.

You know who else likes oil? Andy Beal like oil after the collapse. Beal told Forbes that he has been pretty inactive the past five year. He said ““There has not been anything to invest in. It’s the craziest environment, a world flooded with money. It’s hard to sit by and pick your nose when you want to be doing deals.” However he is now ready to pounce and begin lending to oil and gas companies He told the magazine that “We are trying to get real active in the oil patch. We’re looking at some decent-size deals, hiring people–we are going to go after it.” According to the article he thinks that a long term rise in oil prices is pretty much inevitable. While he deal with the credit side of things and not the equity I have to think this is good news for our well-financed energy companies.

Speaking of banks, small banks continue to perform as advertised. Back on December 22 I wrote to my members saying “I have two bonus picks for you today. These are very small banks that do not trade a lot. You have to use patience and limit orders and not everyone is going to get filled around current price so I won’t include them in the portfolio. Fairmount Bank (FMTB) is a small Baltimore bank with 1 branch and just $76 million in assets. Joseph Stilwell owns 7.02% of the stock and purchased more shares recently. He also said that if the sale of the institution is not sold he will seek a board seat as soon as possible. The stock is super cheap at 75% of book value, the equity to assets ratio is 15.10 and nonperforming assets are only 1.42% of total assets. It is a safe and cheap bank that is probably too small not to sell in the near future. Be aware of the spread in this stock and use a limit order near the last trade of $21.70. Do not pay over 23 for the shares.”

Today we got this lovely news. “Hamilton Bancorp Inc. (NASDAQ: HBK), and Fairmount Bancorp Inc. (OTC Pink: FMTB), jointly announced today that they have entered into an agreement and plan of merger. Under the terms of the merger agreement, Fairmount Bancorp Inc. and its subsidiary Fairmount Bank (collectively "Fairmount") will merge into Hamilton Bancorp Inc. and its subsidiary Hamilton Bank (collectively "Hamilton") in a cash transaction valued at $30.00 per share, or approximately $15.4 million in the aggregate. As a result of the merger, Hamilton will have five branch locations and pro-forma assets totaling $366 million with $215 million in loans and deposits in excess of $276 million.

For those who were able to snap up shares we have a nice 4 month gain of 35%. Not too shabby. If oyu are not in the little banks with us, click here to join here today.

Have a great week everyone.

Tim

Song of the week: Little banks continue to look like:

https://www.google.com/?gws_rd=ssl#q=green+grass+and+high+tides+lyrics