2016 has started with a panic and most markets are in correction territory from recent highs. One can’t point to any specific data point to explain the declines. China has a serious stock market problem. It has been overvalued for a long time and there are certainly some considerable structural flaws to that economy. It’s slowing growth is a major reason why just about every commodity industry is in a cyclical depression and I don’t use the depression word mildly. While these 7% a day declines in China do scare market participants, the fundamental impact on U.S. companies is really not too substantial. Friday’s jobs number was quite strong and that augurs well for the U.S. economy. As people get new jobs they purchase things like cars and ultimately houses, two massive industries that can propel growth. Consumers have been much less aggressive in their personal spending and have been focusing on things like reducing debt. Millennials are belatedly entering the housing market where homes are affordable. A big problem is that where a lot of the job growth is, housing is quite expensive and credit isn’t as loose. Eventually more new affordable supply should come around. The other housing catalyst is what they call “boomerang” buyers. These are people that perhaps got foreclosed or did a short sale and are now finally able to begin looking to buy once again.
Last week just about every stock got absolutely slaughtered. It happens from time to time and the geopolitical outlook was truly terrible. Now is not the time to be scared out of stocks. I can tell you that I’m going to be adding aggressively to my own account. General Motors trading at 5 times forward earnings and a 5% dividend, I’ll take that. Citigroup at $46 per share with a $60 tangible book that is growing, I’ll buy. Bank of America a little above $15, which is below tangible book value, I can’t get enough. Believe me on something, I’m not looking at the global economy with rose colored glasses. I see the problems. I don’t see a pro-business government, I don’t see the wage growth that everybody is looking for, and the strong dollar is really hurting our industrial companies. All of these factors are taken into account in the investments that we make. We would make 30% on Citigroup if it just gets to its tangible book value of $60 per share. That is a very conservative metric which is growing. The company has never been in stronger financial health. Will the problems in the oil industry, cause them to increase reserves? Yes. That is banking 101. It happens and it isn’t a huge part of their diversified revenue streams. Current prices reflect a severe recession. I don’t see that in the cards, although a mild recession is certainly reasonable.
The timing of this selloff is interesting as we have a great deal of put options expiring in the next week. Many will expire, allowing us to keep the whole profit, but even better we are going to likely get exercised on quite a few. This is dollar-cost-averaging at its best and our portfolios are going to be levered to benefit as these stocks recover. Not only did we only sell puts on stocks we want to own, we collected large premiums and now we will get all the upside or downside that comes with the stocks.
This is probably the cheapest our portfolios have been relative to earnings and book values since the founding of T&T Capital Management. That is also something I do not say lightly as there were quite a few great opportunities particularly in late 2011. If you have money to add, I’d suggest getting in with prices this cheap. If you haven’t done your IRA contributions for the year, now is the time. If you are sitting on a low yielding bond portfolio, get out and let’s buy some stocks. Wouldn’t you rather own GM with a growing 5% dividend at a measly 5 times forward earnings than an investment grade bond yielding 3.5%, where increasing interest rates could easily lead to losses?
Please don’t take this as a call that stocks as a whole are cheap. The markets still aren’t even after the decline. This is why we need to be stock pickers and we need to be smart and disciplined. “Our” stocks are the ones that are incredibly cheap. Ultimately prices will converge with the business values. Don’t let the mood swings of “Mr. Market” control you but instead take advantage of this temperamental man. This is how we make money in stocks. People who lose money panic. They obsess over short-term mark to market fluctuations. They chase things that are hot without any respect to price. This is not us and we won’t ever do those types of damaging behaviors with our hard-earned funds. All we need to do is focus on our long-term goals. Many of our stocks are paying nice dividends at current prices that they fund out of earnings and cash flow, so they are stable. As we get exercised on some of our puts, we will be implementing an aggressive covered call program. This should generate ample additional income, reduce risk, while still providing considerable upside potential. Historically, the biggest money we have made is when we have gotten exercised on puts. The income from expiring options is great, but I’m ecstatic to get to own these great companies at these prices. Believe me, if we are in a world where GM remains at 5 times earnings and Citigroup and Bank of America are valued at below tangible book value, we are going to have major issues in the world that will make this look trivial. I believe many people are so scarred from the Great Recession that they believe it the next one will unfold the same way. They are always different and rarely do they involve the same groups as the last one. Be confident, stay calm, and let’s make some serious money by buying quality businesses at insanely cheap prices!