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Update: A very uninteresting market

October 6, 2016

I’ve just logged in again after more than 12 months of silence. Why so long? The answer is simple: I haven’t been enthused about the US stock market for over 2 years. I just don’t see many ‘long term values’.  Instead I see a lot of potential downside.  When it looked like there was going to be a meaningful correction in US equities last January/February I began to perk up and take note. Unfortunately, the mini correction was over almost before it began, and now US markets are once again at or near their all time highs. I continue to believe that by all meaningful measures equity markets in North America are at historically high valuations, with price earnings ratios and operating margins at the high end of historical ranges. Many market observers justify these levels because of the continuing low interest rate environment. While I can see that using low interest rates in a cash flow valuation model leads to higher company valuations, the unanswered question remains how long interest rates will stay low. I have to admit, they have remained low for far longer than I (and most economists) expected, but, as they say, the past is no indication of the future. I think we are being lulled into a false sense of security; When we humans consider the future our brains are wired to give the recent past a heavier weighting that the distant past, and so we tend to project the recent past into the future. Valuations, in my humble opinion, are currently reflecting this bias. When interest rates do begin to march higher, I have a feeling the spell will be broken, and suddenly! Investors will be forced to face the fact that 0% interest rates are unusual, and that they will only go up. The market re-valuation will be swift and merciless.

The question remains, what to do until that day comes. And how to have enough patience to wait out the ‘general consensus’. Keep funds in cash? Possibly. But you can only hold so much cash. Cash sits in an account, earning no interest in todays environment, and makes an investor question whether indeed he/she IS an ‘investor’. No investor worth his/her salt wants to be un-invested for years. It’s kind of unnatural. The inclination to ‘put money to work’ is too strong.  Last year my solution was to park funds in several municipal bond funds under the theory that the low interest rate environment would last much longer than was, at the time, deemed possible. I sold these in January/February when the US equity market sold off with the thought of moving these funds into equities. That didn’t happen as valuations never met my thresholds.

So what have I been doing in the interim? I’ve sold off some of my smaller holdings that didn’t work out (CVEO, COV, RYAM) at a loss, pared back some other holdings, and sold out ZINC at a big loss (Shame on me for following the BIG BOYS). Most of these funds have remained in cash, but some have been put back into liquidations (Winthrop Realty Trust and NY Realty Trust) which should throw off cash once every once-in-a-while as the liquidations progress. I’m still well over 50% cash at this point and plan to continue holding more or less this level of cash until market valuations become more attractive.

My holdings in order of size now consist of:

Fortress Paper (FTPLF)
NovaGold (NG)
Resolute Forest Products (RFP)
Bank of America A Warrants (BAC.WS.A)
Winthrop Realty Trust (FUR)
Altius Minerals (ATUSF)
Gyrodyne Corp. of America (GYRO)
New York Realty Trust (NYRT)
Cherniere Energy (LNG)
BFC Financial (BFCF)
Aviat Network Systems (AVNS)

I think this is fairly defensive with two gold/commodity stocks (NG and ATUSF) and three liquidations (FUR, NYRT and GYRO). I have been looking for something in the out-of-favor oil patch for the last 6 months but have only come up with adding to my small position in LNG which I first purchased before the swoon in oil prices a year ago.

One Comment
  1. Brad permalink

    You’re not alone in having a hard time with this market right now. S&P TTM PE is 25. That’s pretty frothy, and when you consider how low inflation is, doubly so. Sadly as always there’s no telling how big the bubble will get, when it will pop, and what will pop it.

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