I am Main Street America, born and raised in Cincinnati. As a young man, I moved to Manhattan for Morgan Stanley and got my Masters at New York University. Then I came back. I don’t fashion myself a “Fast Money” guy but I’m not ignorant to its market relevance. I shy away from publishing “Top Down” perspectives because my more unique talent is in-depth investigative analysis. Consider this piece to be one man’s observation; it is food for thought.
The Big Banks
Big banks as a group have heavily diluted their common stockholders. Their businesses benefitted from syndicate transactions and consultation; addressing intra-group balance sheet issues. Simultaneously, cheap share prices attracted the most aggressive “wall of worry” climbers.
Equity dilution and windfall tax possibilities have tempered each big bank common share’s intrinsic prospective long-term reward. Commercial Real Estate and Credit Risk are old concerns. More importantly, different business risks to this group are emerging with political proposals to eliminate proprietary trading and eliminate advantages over regional banks.
Big banks should stay in business, but I have a hard time contemplating a fundamental case for investing in their common stock. There are better alternatives with more reward or less risk, frequently both.
Broad economic recovery appears probable, regardless of short term inferences made by indices. The first two articles of our Sunday paper’s business Section were titled “Local community bank lending outpaces nation” and “Shift to thrift is the new normal”. My point is not that our journalists are pure genius. Rather, I suggest taking five steps back and putting yourself in the shoes of Mr. or Mrs. Smith. These are not fear inducing headlines to Main Street America. These headlines do not alarm consumers or businesses.
I’m neither shorting big banks nor speculating on what the Market does in one day, next week or next month. I am decidedly not a “Slow Money” guy who never sells anything. Rather, I am a lot more concerned with my risk-adjusted performance over long periods. I make choices of risk acceptance selectively through my investments. I focus on maximizing anticipated reward for any given level of intrinsic and market risk, utilizing in-depth analysis. I have recently written articles on each of these holdings.
Favorite General Equity Position: General American Investors (GAM) is a Closed-End Fund whose manager confirmed to me Thursday that their only bank holding is one regional. This Closed-End Fund history shows market-beating long term performance. It currently trades at a market discount significantly greater than its 10-year average.
Favorite Conservative (Bond Style) Position: Prudential Inflation Linked Note (PFK): is an exchange traded bond security which I believe to currently be a superior alternative to other inflation protection instruments. PFK pays monthly coupons tied to inflation and matures at $25 early in 2018. PFK is very inefficiently priced, in my view but is inappropriate for leveraged investors and “Fast Money” because it trades very low volume.
Favorite Special Situation: Alpine Global Premier (AWP) is a highly liquid Closed-End Fund currently trading at a double-digit discount. My primary thesis is based on research specific to its “wrapper” but its underlying portfolio of assets may also offer superior risk/reward to the alternative of common stock in big banks.
“Mr. Market” will in time determine today’s most valid “Top Down” views, much as it will assess specific implementation choices for of each view. My own portfolio got a trim last week, as did any diversified non-hedged portfolio. Still, the risk of avoiding financial assets, or worse, shorting the broad market over the long term may be the greater long term risk of all. Observing the price Warren Buffett paid for Burlington Northern (BNI) may be most useful in implying his deduction as to the importance of cash being invested (somewhere).
Disclosure: Long GAM, PFK, and AWP. No short positions.