I can’t say I’m sad to see the first two months of 2016 go. I’d say it was a roller coaster, but it felt more like a free fall as markets across the globe absolutely tanked. While this will inevitably happen from time to time, actual economic fundamentals are not bad. Today we got pretty encouraging news that companies are still hiring at a decent clip, despite sluggishness in the energy and manufacturing sectors. Yesterday the ISM data was better than expected and the real estate numbers still look promising. This is what ultimately will matter for our key positions. The market has priced in a major recession for financial companies in particular. That seems highly unlikely to occur in the near term. Yesterday we saw a massive rally in our positions. I believe that as we get closer to the CCAR results, where new dividends and stock buybacks for the banks will be approved, we should see further signs of strength. There are actually some more slightly positive developments occurring in relation to Puerto Rico, which impacts our bond insurance positions. There seems to be a little bit of sentiment emerging that a financial control board would be far more helpful to the island, than some retroactive bankruptcy option, which would completely violate the island’s constitution and set a terrible precedent for other poorly managed governments. Regardless of what happens, the future for our investments in the sector look extremely promising as the current prices are just too attractive to ignore and make no sense when you factor in the fundamentals.
Below is a fantastic conference call held by one of my favorite investor’s Bruce Berkowitz of Fairholme Funds. He is a wonderful value investor that also believes in going against the crowd and putting the most money in his positions with the best risk-adjusted return potential, as opposed to an overly-diversified approach, which is all the rage these days. Like most value investors such as Warren Buffett, Carl Icahn and Bill Ackman, the last year hasn’t been too great for Berkowitz but his long-term returns are tremendous. Once again as we saw in 2011, many market pundits are writing him off and his fund has been hit by redemptions. In 2011, I believed he was right on many of his investments and we had a lot of similar positions. Stocks such as AIG and Bank of America were beaten up for no good reason and we added significantly to these stocks during that 2011 downturn, leading to spectacular returns in 2012 and 2013. I see the exact same thing emerging out of this panic. One thing I liked in this conference call was he talks about his Mom firing him again, which has always been indicative of a bottom in terms of his performance. This is often how it goes, as many market participants focus on the short-term and get scared out of great investments. I can tell you that I’m amazed at the clients of T&T Capital Management that consistently add during downturns, and don’t panic despite the pessimism that has pervaded the markets over the last few months. This is what investing is all about and I have no doubt your confidence and trust will be rewarded. Those of you that have invested with us for a long time, have seen these cycles before and it is in this environment where we can make the most money. The option premiums that we are receiving via selling puts and covered calls are very lucrative, and the margin of safety and return potential on our common stock positions has never been greater. I hope you enjoy the transcript and as always, if you have any questions, please don’t hesitate to contact me directly at 805-886-8140.
February 23, 2016 – Fairholme Capital Management Public Conference Call