I have spent a lot of time thinking about James Montiers comments about the choice of hellish prospect for the market and find that I am pretty much in agreement. For me the worst kind of market hell is what we are experiencing right now. There are few cheap stocks outside the community bank space, the economy is mired in the better but not good condition that has been the same for some time now and stocks trade back and forth without really doing much at all. Every piece of good news is met with an equal proportion of bad and we just tread water. There are multiple geopolitical and economic challenges to the market but all cans are kicked down the road. At some point China, Greece, the Ukraine, stagnant revenues and financially engineered profits could easily cause a sever market decline but so far it has not happened.

The other kind of hell is that stocks catch another leg higher and things like market cap to GDP and the Tobin Q ratio approach levels not seen since 1999. We are already above 2007 levels and as I have become very fond of mentioning we can argue about the market being fully or fairly valued but we cannot even begin a conversation about the market being cheap. If continued lower rates drive the market higher it means the economy is still weak and rising stocks will make the gap between Main Street and Wall Street even larger than it already is. Economically, politically and socially speaking there is no way that works out well for anyone.

My favorite version of hell is the one where the market goes there in a handbasket. One trigger or another is fired and we finally get a significant pullback in stock prices. Folks that re fully invested in the ever popular growth and momentum stocks, dividend paying blue chips and various index ETFs will feel the pain. For the most part I will not due to heavy cash balances and a heightened sense of caution that has me focusing on community banks and only the very cheapest of stocks. That hell will be our party as we can finally get some of this cash deployed in undervalued assets and underpriced streams of cash flows. I cannot predict with any degree of certainty when or if this happens but I sure do hope to hell its sooner rather than later.

Every time I turn on the news or open the paper-and I’m a news junkie so that’s often- someone somewhere is protesting something. As I write this there are protests going in Greece as the population is basically protesting living in Modern Greece, in NY Uber drivers are protesting any regulation on their pick-up and delivery services, Japanese citizens are protesting the new security bill, in New Dehli there are rallies against the new Value Added Taxes and the good people of Perry, Ohio are protesting the circus. Every dya its something. Taxes, religions, marriage, guns, war, rich people, big banks, animals, whatever the flavor of the day happens to be there are protests all over the world. I understand it for the most parts. Sometime so you are just so passionate about something or so pissed off at some action, group or what not you just need to make signs, block traffic, maybe break a few thinks and just shout. I get it. I am too lazy to engage in such activities unless they extend the playoffs and add more wild cards to MLB.

I have to confess that there is one thing about protests that puzzles me. What aren’t all the Fed district offices, Congress and the White house surrounded by a sea of senior citizens outraged by what fiscal policy has done to them? In a time of Zero Interest rate policy yields on fixed income and bank products have disappeared leaving the seniors with choice of venturing in the dangerous and predatory waters of Wall Street to provide income or go back to work. That’s not much of a choice, I am constantly shocked that the occupants of the stately building at the corner of 20th Street and Constitution Avenue NW in our nations capital do not constantly look out a lawn blanketed by an angry sea of white hair, bad knees, walkers, wheel chairs and really angry older folks. I would be there wanting to know just exactly why making sure banker bonuses got paid and stock prices went higher- because that been the only visible benefit of ZIRP- they felt it necessary to plunder my retirement funds.

I have an acquaintance who worked his butt off all his life. Just ask him. Give him a sip or two of brown liquor and he will tell you all about walking uphill both ways to school barefoot in the snow after he delivered papers, milked the cows and fed the chickens. He did his bit in the military, went to Vietnam (that he doesn’t talk about even if you give him the whole jug) and came home to start his life. He went to work as a salesman and for the next 3O+ years of his life, he ht the roads and Holiday Inns, he made his calls, raised his family and saved his money. He got a little lucky with some real estate and those funds along with his tidy nest egg built by doing without things and voraciously saving his cash he was able to retire early. The windfall bridged the gap until social security kicked in. His wife passed away fairly young and the kids were gone so it was just him, a decent little house and a five figure IRA carefully invested in bank CDs, treasuries and a few ultra high quality corporate bonds. When he retired back around the turn of the century that nest egg through off more than enough income to meet any extra or unexpected expenses that came along. My fiend fished every day, read a lot of books, played with his grandchildren, paid his taxes and lived the American dream. For the past five years as rates have been held at or near zero the income from the nest egg has disappeared almost entirely. It won’t cover the property taxes, new car, or boat engine the way it used to. These things are now covered by dips into principle and the big question becomes one outliving the cash.

My friend never invested in stocks or bonds. He is of an age where childhood stories of uncles and grandfathers wiped out in the crash of 29 still resonate. He believed that saving and investing conservatively was enough. For most of his life, right up until the last five years that has been true. Now, in his late 70s is he supposed to become a sophisticated investor? Should he trust Wall Street with its long history of cooking up high fee income investments designed to pick the pockets of people just like him?

Folks like my friend are why I started the Value Income portfolio. It’s a mix of high yield stocks like REITs, business development companies, closed end funds with activist shareholders and MLPs blended with industrial, technology and financial companies that have decent dividend yields and outstanding dividend growth potential. Right now the average yield is over 8% . The stock in the portfolio are undervalued as measured by things like price to book and EV/EBIT. I look for margins of safety using things like credit scores, F-scores and z-scores. It will fluctuate more than a banks CD from month to month but over time I think it will throw off needed income and slowly grow your principal. With a yield over 8% even the most risk adverse type could use 3% or so of the cash flow to hedge against anything greater than a 10% market decline and still enjoy a more than 5% yield.

The income portfolio, along with the Deep Value and International Portfolio, is part of the Deep Value Service. You can check it out here.

The wife heads back from Texas tomorrow and the owners of the local take out joints were reported to be shedding tears over her return. Baseball picks back up tomorrow as well and the Orioles will try to reverse that nasty slide before the break. We move deeper into earnings season and will start to see more of our little banks report second quarter results. I expect some good showings with strong earnings , dividend increased and buybacks. We already have two buybacks announced this past week and one of our little gems reported a 40% year over year earnings gains.

Have a great week everyone

Tim

PS One of the days the Speaker of the House, The President and the Fed Chair will look out the window and see a sea of older folks singing https://www.youtube.com/watch?v=1qaHyvyr43c and demanding higher rates on savings products.