Another week, another rise for the stock market. The big news this week is Janet Yellen's speech. The Nationals-Cardinals game I planned to watch at that time was rained out, so I went with the traditional Fed speak nap. When I returned to the office after the long commute down the hallway through the traffic snarl of cats and dogs, I found the market really liked the speech and was again trending higher. The ghouls of Wall Street loved the fact that she said things were just okay in the economy and the pace of interest rate hikes would be slow. Junkies love their dope and traders love low interest rates. We may need to develop a 12-step program for Zirp-addicted stock traders in the near future. Bad is the new good for now in the stock market.
I was in Chicago last week to visit with the kids and take in an NCAA tournament game. Some of the folks I was with were experienced investors with even more time in the game than I have, and there is a general sense of WTF when it comes to stocks and valuations. Almost everyone felt that the early year weakness would be the start of a real inventory creation event and were puzzled that the indexes just refused to stage a meaningful decline. Valuations are not cheap, the economy is permanently mired in a not horrible but not great condition, earnings forecasts are being guided down and the bull case has rested on low rates and rising oil. If you started in this racket before 2006, much less back in the age of Quotrons and stock guides like we all did, none of this makes much sense. In the good old days, markets when up when the economy and market were perceived as going up, and went down when it looked like they would slow down. There was a correlation with rates, but rates also moved with economic activity and were not held down by central bank edict.
Yellen addressed the oil conundrum in her speech. She noted that “A second concern relates to the prospects for commodity prices, particularly oil. For the United States, low oil prices, on net, likely will boost spending and economic activity over the next few years because we are still a major oil importer. But the apparent negative reaction of financial markets to recent declines in oil prices may in part reflect market concern that the price of oil was nearing a financial tipping point for some countries and energy firms. In the case of countries reliant on oil exports, the result might be a sharp cutback in government spending; for energy-related firms, it could entail significant financial strains and increased layoffs. In the event oil prices were to fall again, either development could have adverse spillover effects to the rest of the global economy.”
Oil prices are up about 8% in the past month and many of the stocks have begun to recover. It is no great secret that we were way early in oil and have benefited from the bounce and would not be unhappy to pay more at the pump if it meant our stock prices would move close to what we paid. The energy stocks we bought in 2015 are actually doing well, but we are a long way from even much less profitable. I remain quite confident about long term future of all our energy positions, but would not mind the bump I would get from a continued short term recovery in crude oil prices.
In what has been a difficult environment for value investors, community bank stocks remain the teddy bear that keeps the monsters at bay. No matter what nasty geopolitical event develop, what oil prices do or the mean old economists say, community banks are seeing better business demand, strong deposit growth, excellent credit conditions and a continuing consolidation trend. M&A activity has been slow in the first quarter as bank stock prices have been a little weaker, but we should see activity pick up in the second half of the year.
A recent article in American Banker pointed out all the reasons that most observers think that M&A activity will pick up as the year progresses. Chris Marinac of FIG Partners said that he thinks many bankers are starting to realize that the issues they have been facing like regulatory and technology costs, as well as low net interest margins, are not going to go away any time soon. This is going to cause many to rethink their desire to remain independent. Dennis Trunfio, head of banking and capital markets at PwC, said he expects activists to continue to push for takeover activity amongst community banks and may begin to move up the size scale. Both PL Capital and FJ Capital have formed funds to pursue larger companies recently, so we should see increased activist activity in larger community banks as 2016 progresses. If you do not own community bank stocks, you should.
Baseball returns for real on Sunday as opening day of the regular season is upon us at last. My Orioles open with a home stand against the Twins and then the Rays before moving onto Boston. It's that time of year when everyone is undefeated and we all have a chance at the playoffs. I can’t wait to watch all the great new young superstars in the game and am very pleased that baseball tonight will once again be in the regular viewing rotation.
Have a great week everyone!
Tim
In a tough market, community bank stocks can be like teddy bears.
