Two weeks ago for the first time in a very long time small regional banks started to show up on our model selection list. It was refreshing to see them after a half dozen years in financial Siberia and one of them appears will have a very good short term payoff. Just as in the case of Sun Healthcare in June, we’ve only had a short time to build the position but the position is in place for most client portfolios.
Citizens Republic Bancorp is a small regional bank operating in Ohio, Michigan and Wisconsin.
Our client cost basis is in the $17 t0 $18 range which may not seem like much with the stock now trading at $19.17 up $1.53 on the day. Its the news that matters: CRBC announced it is hiring JP Morgan to seek a buyer for the bank.
Assuming JP Morgan can find a buyer the big question will be at what price. Here we have to dig into the financials of the bank:
CRBC Book Value: $26.53
Capital ratios are healthy and non-performing assets are improving.
Over the past three months insiders have purchased 11,200 shares.
Long CRBC
When markets are weak I always remind myself of the black and white movie The Enemy Below with Robert Mitchum and Curt Jurgens. When Jurgens’s U-boat was attacked by Mitchum’s depth charges “Take me to zee bottom, I vant to go to zee bottom!”
Jurgens was fascinating in another respect in that he was born in 1915 in Bavaria and in 1944 sent to a concentration camp in Hungary as he was deemed “politically unreliable”. If Jurgens was considered unreliable, imagine what they’d think of Mitt?
The media is transfixed as always with labels and since the S&P 500 has fallen 10% it has officially become a “correction”. But thats in the past and what do we anticipate in the future. There has certainly been a change in trend that hasn’t show any sign of interruption, but could this be the midpoint on the way to a 20% Bear Market?
The break below 1300 along with a series of declining peaks is not a market investors should step in front of to anticipate a bottom. Realistically, we should bounce sometime soon, but this will be an opportunity to lighten up again in preparation for a move to 1250 or 1200. My guess is that the worst possible outcome would be 1150. However flipping the coin over, this may be the best potential outcome for our clients do to our very defensive posture holding in a range of 50% to 100% cash at present.
According to Jason Goepfert since 1928 there have been 24 instances where the market has declined 10% while within 3 months of reaching a 52 week high. In those 24 instances, 1/2 went on to protracted bear markets with losses of 10% or more (in addition initial 10% loss). On a brighter note, half of the 24 declines ended soon enough that new highs were registered within approximately 3 months. In my opinion this is a likely scenario for us this year, but we must still go through a bottoming process and that will take weeks.
This too shall pass.
Brad
No positions
So, until proven otherwise this is not the time to press our bets but remain very defensive. We will be able to be very aggressive again once the markets have finished the bottoming process.
Today’s market weakness compels me to make a few comments here. A couple of weeks ago we went to a neutral stance on the US stock market despite the fact that it had already declined 4% in the preceding weeks. Some may say “Whats the point of selling now after a 4% decline?” My answer is simply that you have to draw a line somewhere because a 4% or 5% decline may be the start of a 10% or even a 20% decline. We’re in a great position with almost all accounts still in double digit returns YTD and with a very large percentage of cash on the sidelines. We can use this decline to our advantage by deploying our high cash % when the inevitable intermediate term rally emerges. I’m not in the business of trying to figure out where the exact bottom is, I’ll be looking for extremes in negative investor sentiment combined with emerging market strength. After a decline of today’s magnitude we’re much closer to significant second half of the year rally.
Always keep in mind that big rallies are born from big negative sentiment and today’s decline will make a significant contribution to negativity.
If you’re a new investor who’s looking to gain an edge or considering becoming a client of RMHI please understand that this is the chance for you to get in cheap without having to chase holdings in a mature bull market. This is why during periods like this I begin to develop my shopping list of future holdings and wait for the chance to buy which will occur when our intermediate term indicators turn positive.
All the best,
Brad
No positions mentioned.
A few thoughts while watching Facebook trade below $29 (The stock reminds me of one of the bodies tied to the bumper of an old Buick in the opening credits of Magic City):
Market bottoms are typically a process and not just a particular point in time. After the sell-off we saw earlier this its normal to see the markets bounce around where there may be at least two visitations to the lows, if not more. As the chart below reveals, the red arrow indicates the low as marked by the indicators but that does not mean the investors should jump in just yet, time is necessary. The following green arrow shows a secondary low that is either close in value to the previous low or can come significantly below in a truly bad bear market. Typically the secondary lows will have significantly less momentum and thus offer a better potential entry point.
Since this process can take weeks if not months, we’ve raised significant amount of cash in the range of 50%. Our goal is to minimize risk and volatility during this unstable period by selling off either lagging or losing holdings and choosing to hold just our strongest performers. Patience is the key at this point and trying to force performance right now is a mug’s game.
The rationale for the weakness continue to be the Eurozone mess which is now focusing on the financial stability of Spain in tandem with the ever expanding mess in Greece. While the effects of the Eurozone mess are questionable in terms of their effects upon the US, investors are choosing to sell first before hard data shows otherwise.
This too will pass in time.
No positions mentioned.
Chart courtesy of Decisionpoint
Discipline trumps conviction and despite whatever I may think that the risk isn’t large at this point our market models are flashing no better than neutral at this point with some at an outright sell. For the past month profits have come with the ease of fighting an uphill battle and I’d prefer to raise cash and wait for a bullish trend to re-emerge.
While we may be at or near a market bottom in terms of our indicators, experience has taught me that in sell offs such as the one we’ve witnessed will typically need a second bottom which could come from a lower level in the markets.
In addition we have significant gains to protect, which is of paramount importance.
This does not change my opinion that there will likely be a very sharp rally in the second half of the year.
U.S. Equity markets have been in a correction mode for better part of 6 weeks and this coincides with the 9 month cycle lows. Its been said that market cycles are more of an art than science but I’ve followed many of them for years and have come to the conclusion that while I may not understand exactly how they work, they’re worth paying attention to.
Within the next few weeks or so we have several cycles that are converging between now and June. It appears that any market trough developing soon will not be considered a major market low but a normal run of the mill trough. However, the matter of significance is the post-cycle trough which could be a major move higher, probably to 1500 on the S&P 500 or 11% by the end of the year.
The explanation for the trough and rally will, at present be open to interpretation. For those that fear Europe being our market’s downfall, the odds are quite low that Europe will derail the U.S. since its extremely rare that a major issue be discounted in stock prices more than once. One other issue that made news over the weekend is China lowering reserve requirements. China has been attempting to slow economic growth for close to two years and they may have finally seen enough slowdown to take their foot off the economic brake.
As the chart reveals the 9 month cycle typically is a counter move to the primary trend. In other words, if markets are in rally move (as they are at present) the 9 month trough is a very nice entry point whereby the rally eventually resumes. In a bearish trend, the reverse is true. The 9 month cycle is usually not The tipping point for a change in the primary trend.
Overall, all of our models and timing systems remain positive. So far our present pullback resembles a garden variety pullback seen once or twice a year. Unless the character of the retreat changes in character for the worse I’d view this as an opportunity to add new funds or increase equity exposure.
Brad Pappas
No Positions mentioned
