We are moving deeper into earnings season and the silliness is accelerating. Using a quarterly measurement of a corporation’s conditions and prospects as an excuse to add or eliminate tens of billion of market cap is ridiculous. Unfortunately way too many mangers manage to the number and run their company to meet Wall Streets hopes and expectations. It’s a poor way to run a company and worse way to trade your portfolio. Making bets that your guess about an analysts guess about sales and profits over a three month span is better than someone elses guess is absurd. Professional option traders love earnings season because of all the public money that has no idea of option theory or pricing that pour in to make bets on direction post earnings. It is like being a bookmaker during Triple Crown season or booking prop bets during the Super Bowl. It is almost too easy according to my degenerate options trading buddies in Chicago. But please, keep making your bets. I will be heading to the Windy City soon and the more dumb earnings bets you lose the more money they will have to spend on dinner and drinks.

I waded further into the land of closed end fund arbitrage over the past two weeks. To date I have bough three deeply discounted funds that have activist investor son their shareholder list in the regular portfolio and one in the income portfolio. I will be adding more in the weeks ahead as these high dividend distribution vehicles add cash flow to the portfolio and in tow out the three hellish scenarios outlined by James Montier they should deliver strong absolute positive returns. If we get third scenario of a full blown crash- which to me is more heavenly than hellish give the high level of cash reserves we hold- then the discounts will widen and I will be a buyer of more shares. I have been a buyer of closed end funds in a crash before, most recently when Liberty USA All Star Fund, Zweig Total Return Fund and Several of the Calamos Convertible funds traded at levels that made it possible to buy an already cheap market at a 20% discount. The results were nothing short of spectacular so I would have no fear of just adding to my current buys if we saw a significant decline

In the other two scenarios of a climbing market fueled by low rates or a confused market that just churns sideways we will simply collect dividends and sell when the discount narrows providing up with solid double digit returns. I do not think the fed can raise rates very quickly and any move this year will be face saving in nature and will not be followed by a continuous string of hikes. The economic data simply doesn’t support such a move. In either of the first two versions ov value hell this type of fund arbitrage will provide much higher yields and is a better use of cash than the 10 basis points we can collect on money markets. I will only buy the ones that pass all my tests and have storng institutional and activist support but I am actively looking for opportunities in this attractive and profitable investment approach.

Of course bank stocks remain a huge part of my focus and portfolio. In addition to the M&A wave that continue sot build results for the small banks are spectacular. We had a lot of our portfolio banks report this week and look at these results:

For the three months ended June 30, 2015, XXXX reported net income of $617,000 compared to $550,000 for the three months ended June 30, 2014.

XXXX announced today net income available to common shareholders for the second quarter ended June 30, 2015 increased to $3.2 million, or $0.43 diluted earnings per common share.

XXX CEO said” Our stock repurchase program continued in the quarter with approximately 1.7 million shares being acquired. We also continue to evaluate other opportunities to deploy capital including acquisitions of other banks, branches, or specialty lenders."

XXXX today announced the initiation of a 5% share repurchase program, a $0.02 quarterly cash dividend, and net income of $1,699,000, or $.06 per diluted share, for the second quarter of 2015 compared to net income of $1,306,000, or $.05 per diluted share, for the first quarter of 2015. Net income for the second quarter of 2014 was $761,000.

XXXX reported a net profit of $2,285,000 ($0.10 per share, basic and diluted), in the second quarter of 2015, compared to a profit of $1,687,000 ($0.08 per share, basic and diluted), in the second quarter of 2014.

The Company reported net income of $245,000 for the three months ended June 30, 2015, compared to net income of $188,000 for the three months ended June 30, 2014. Net income for the nine months ended June 30, 2015 was $574,000 compared to net income of $382,000 for the nine months ended June 30, 2014.

This represented a 40% increase in earnings per share from the second quarter of 2014 where net income available to common shareholders totaled $927,000, or $0.05 per diluted common share. For the six month period ended June 30, 2015, the Company reported net income available to common shareholders of $2,685,000, or $0.14 per diluted share. This also represented a 40% increase in earnings per share from the first half of 2014 where net income available to common shareholders totaled $1,804,000, or $0.10 per diluted common share.

XXXX announced that its Board of Directors, at a meeting held today, approved the Company’s second stock repurchase program covering up to 850,000 shares or approximately 10% of its issued and outstanding shares of common stock. The Company has substantially completed its first repurchase program, repurchasing 916,871 shares of the 950,000 shares covered by the program at an average cost of $13.18.

It is really hard to care what the broad market is doing, or what the chattering nabobs on V have to say when you are seeing results like this form the stock you own. Our bank stocks are not really touched too much by day to day market event or news flow. Conditions are improving, takeovers are happening and we still are finding banks at 85% or less of book value in sound financial condition with activist investor involvement.

If you are not a member of Banking on Profits the question you have to ask yourself is “Why the (expletive deleted) not?”

It’s a tough market for value investors. We are kicking over rocks and looking for off the radar situations like small banks and closed end funds with activist investors involved to unlock the value of our holdings.

Have a great week everyone!

Tim

PS- Focusing on valuation, activists and insiders should keep us on https://www.youtube.com/watch?v=hXBzaHAojgk&index=22&list=PL3FCC0A6CB27D4F6A