November 25, 2020

Enterprise Diversified, Inc. v. Woodmont Lexington, LLC

Previously regarding Sitestar (now known as Enterprise Diversified or ENDI but still trading as SYTE), we had a post in 2016 about the activist takeover as well as an interview in Oddball Stocks Newsletter with the new management.

The company put out an 8-K today regarding a dispute with (and lawsuit filed against) the manager that took control of Mt. Melrose, LLC (its divested real estate division in Lexington, Kentucky) in July:
This morning, Wednesday, November 20, 2019, Enterprise Diversified, Inc. (the “Company”) filed a verified complaint in the Court of Chancery of the State of Delaware commencing a civil action against Woodmont Lexington, LLC, a Delaware limited liability company (“Woodmont”).

As previously reported in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 3, 2019, the Company had sold to Woodmont, on June 27, 2019, 65% of the Company’s membership interest in Mt Melrose, LLC, a Delaware limited liability company (“Mt Melrose”), which, as has been previously reported, owns and operates a portfolio of income-producing real estate in Lexington, Kentucky. Since the closing of the Mt Melrose transaction, Woodmont, by its representative, Tice Brown, has made repeated offers to buy out the Company’s remaining interest in Mt Melrose. Woodmont’s most recent offer was received by the Company, in writing, on November 11, 2019, with a deadline for acceptance of 9:00 a.m. Monday, November 18, 2019. All such offers have been rejected or not responded to by the Company, as being unfavorable, undesirable and not in the long-term best interests of the Company and its shareholders.

The present action was filed by the Company in response to repeated claims and demands and injurious conduct by Woodmont and its representative, Tice Brown. The Company is seeking, among other relief available, injunctive, declaratory and equitable relief against Woodmont, along with attorneys’ fees and expenses.
The LLC agreement between Woodmont Lexington, LLC and Enterprise Diversified, Inc. is available as an exhibit here. And here is the most recent investor presentation of ENDI, from November 14th.

The docket shows that Enterprise Diversified has filed a Verified Complaint for Injunctive Relief (Confidential Filing), a Motion for Temporary Restraining Order, and a Motion for Expedited Proceedings, as well as a Brief in Support of those Motions, plus various other documents like proposed Orders. Some of these documents were filed under seal, but the two motions can be seen below:

The case is currently assigned to Delaware Court of Chancery Vice Chancellor J. Travis Laster. We read a lot of his decisions for the "Delaware Chancery Corner" section of the Oddball Stocks Newsletter - he is extremely sharp. 

Life Insurance Company of Alabama

Life Insurance Company of Alabama (LICOA) is a micro cap insurance company with two share classes, one of which (LINS, the fully voting shares) trades at a modest (~20%) discount to book value and the other of which (LINSA, with limited voting rights) trades at a gigantic (>50%) discount to book value. Note that in addition to the voting rights difference, the LINS shares have 5x the economic interest of the LINSA shares.

The company was written up on Value Investors Club and the story is broadly the same as it was then. Despite the big gap between the trading price and book value per share, management is not buying back any stock, and the valuation gap is not closing.

The State of Alabama Department of Insurance periodically examines the insurance companies that are licensed there and publishes a report about them. It is a report that is very helpful for gleaning more information about an insurance company, and helps fill in the gaps between what is in LICOA's bare-bones annual report or even in its annual and quarterly statements filed with the NAIC.

The old reports are not available on the Department of Insurance website, but they are available to anyone who writes in and asks for them. (And pays $1 per page.) The examination report on LICOA from May 2005 has some interesting revelations on the conduct of the family that controls and manages the company:

“It was noted that Rosalie F. Renfrow was hired as a management trainee in September 2002. Ms. Renfrow is the daughter of Raymond Rudolph Renfrom, Jr., a director, officer and stockholder of the Company and Anne Daugette Renfrow, a director of the Company. Ms. Renfrow's monthly salary for 2002, 2003 and 2004 was $1,900, $2,000 and $2,300, respectively, with her salary being increased in September of each year. Ms. Renfrow is also receiving a monthly automobile allowance. This allowance was $300 per month in January and February 2003 and increased to $550 per month for the remainder of the examination period. Ms. Renfrow did not keep regular business hours at the Company – it was noted by examiners that she was routinely not in the office.”

“Company management is not avoiding the appearance of impropriety. If Ms. Renfrow is being developed for a managerial position, she needs a defined job and training program. Due to nepotism within the Company, the Company's President should either actively supervise the training (before it happens, while it is happening, and after the fact) or delegate it where possible. Ms. Renfrow should report to the manager of each department in which she is training. The examiners find it highly unusual that a recent college graduate would be allowed to set their own schedule while receiving a full-time management salary. The preceding report of examination noted an issue with nepotism and this issue stands to harm the Company due to potential shareholder and/or policyholder lawsuits. It is imperative that the Company avoid the appearance of impropriety with the payment of salaries to family members. Ms. Renfrow should maintain working hours comparable to other employees of the Company and report to someone other than her father, Mr. Raymond Renfrow, in order to avoid internal control weaknesses and the appearances of improprieties.”

It is pretty amazing to see a report by a state regulator pointing out behavior by small company management that could cause "shareholder lawsuits". For one thing, only a certain subset of companies have their operations holistically assessed by a regulator: banks and insurance companies are two. And even then, the reports by bank regulators are not usually going to be seen by investors.

One wonders what was in the "preceding report of examination" as well? Meanwhile, here is the full report from 2003 as well as an excerpt with the section called "Other Compensation Issues".

What It Takes, Dimon, Twitter etc.

Recently, I've gotten some emails asking about the blogger email updates. I googled around (again) recently for a solution and couldn't find one, and also looked at some mass email services and they aren't free over a certain number of subscribers.

So, as has been suggested here by some over the years, I just set up a Twitter account to announce when I have a new post.

My handle is: @brklninvestor

I know many of you are not on Twitter, so I will figure out an email solution too, eventually.

Dimon on 60 Minutes
Jamie Dimon was on 60 Minutes this past Sunday. He is still one of my favorite CEOs and is great to watch. I thought his response to the question about running for president was pretty funny; "I thought about thinking about it..."  That reminds me of one of my favorite Dr. Who lines (from the Eleventh Doctor, Matt Smith), "Am I thinking what I think I'm thinking?"

Anyway, in this environment, there is no way people like Dimon or Bloomberg would gain any traction in the Democratic party. I think either of them would make great presidents, but it just won't happen. No chance at all, unfortunately.

When Lesley Stahl mentioned the bailout of the banks during the crisis, Dimon should have pointed out that it wasn't really a bailout; all the money was paid back with interest (at least the major banks paid it all back). Schwarzman in the book below talks about how he cautioned Paulson about this; to try to avoid the use of the term bailout as it could become a problem if that word stuck. To this day, I still talk to people who think that the banks were "bailed out". They think that the government just gave the banks free money with no strings attached. They are often surprised to hear that the money has been paid back in full, with interest.

Having said that, the definition of "bailout" seems to be to offer financial assistance to an entity on the brink of collapse, so maybe TARP was a bailout. But still...

When asked about CEO pay, Dimon said, "what do you mean?",  or something like that. It was clear he was trying to just avoid the question. To say he has nothing to do with his own compensation, while it may be technically true, wasn't really convincing to people who wouldn't understand. He could have just agreed that CEO pay is too high in this country, and that it should be dealt with at the tax level but probably shouldn't be resolved legislatively or whatever. No need to dodge the question. There is nothing wrong with saying that high income people should pay more in taxes (at higher rates), and that some of the crazy loopholes that reduce tax rates for the rich should be closed etc. He is not running for public office, so he is not taking any risk in saying stuff like that.

But anyway, it was nice to see him on 60 Minutes. Although I am progressive on many issues, I find the current anti-corporation sentiment to be unfortunate. Companies can only change their image by their actions. More and more companies are acting like they are the solution rather than the problem, which is good.

Markets
The markets are kind of crazy. I don't mean this rally, necessarily. A lot of this rally is just recovery from last year's drop and valuations are still in a zone of reasonableness, so I am not at all alarmed by it or worried about it.

I mean the way the markets react to every Trump tweet, or nowadays, Elizabeth Warren ideas. I like Elizabeth Warren a lot, actually, even though she seems to hate Dimon and everything Wall Street.

Whenever the markets tank when Warren's poll figures go up, just remember what happened on election day in 2016; the markets freaked out and tanked when it realized Trump is going to be our next president. But before the next morning, the market took off and hasn't looked back.

Remember what happened to health care stocks in 1992 (Hillary-care), and 2009 (Obama-care). When widely publicized problems hit the market, it is very hard to predict what will happen. Howard Marks would call reacting to these headlines first-level thinking.

First of all, we don't know if Warren is going to be nominated. Even if she is, we don't know if she will beat Trump. Even if she wins, we don't know how much of her plan can be executed successfully (will she run to the center for the general elections? Will she take a more prudent, realistic course of action once in the White House? I'm not saying her ideas are bad or impractical, but she can calibrate her goals according to the reality she confronts once she's there).

There are so many levels of "unknowns" that it makes no sense, really, to try to discount these things so far ahead.

Anyway, if any of these things move the markets too far in any direction, it's probably a great time to take advantage of it and go the other way.

Growth vs. Value
I hear and read about this all the time, and I totally get it and agree. I am a believer in mean-reversion. On the other hand, there are secular realities hidden in these figures too. For example, Bed, Bath and Beyond (BBBY) is one of my favorite stores and was one of my favorites in terms of management. I followed them closely for years, and eagerly looked forward to their annual reports. But it was always a pretty expensive stock. When it finally started getting cheap, it seemed to have lost it's way.

BBBY



Maybe I am putting in the bottom in this stock, but these days, it's hard to figure out what this company is trying to be. Not too long ago, you would walk into a BBBY and then, suddenly, in the middle of the store, there would be like a miniature supermarket, with potato chips, cereal and whatnot. I was like, what?

It's like the newspaper business. As Buffett says, if you wouldn't start the business from scratch today, then it's probably not a good business. And if it's not a good business, you probably don't want to own the stock.

Again, I loved BBBY for many years (and it's just luck that it hasn't been a part of my portfolio), but it's hard to think of a reason for it to exist. A lot of what they sell is exactly the sort of thing Amazon is very good at selling, and for lower prices. Stores like Target are also selling similar things for competitive prices, so I guess it's a similar story where Target/Walmart/CostCo and others (Amazon) are killing the category killers; same as CD stores, book stores, toy stores etc.

This is not to say necessarily that we should go long AMZN and short BBBY, JCP and other retailers (well, that's been a great trade for a long time!). It's more of a question about how much of this growth versus value is the usual cyclical thing that will eventually mean-revert, and how much of it is secular destruction of multiple industries (I don't think most retailers will recover).

WeWork/Softbank
This is a fascinating story. I really admire the vision and conviction of Masayoshi Son. He is fun to watch and follow, and I have always wondered when and if I should buy Softbank stock. There were many reasons to buy it, especially the usual discount to the sum-of-the-parts valuation and things like that.

But one thing that has always bothered me was his almost reckless aggressiveness. I guess that's a good thing for someone in that area, but it was always a little too scary for me. I remember watching him in an interview, laughing at the fact that the price of Softbank stock went down 99% (or whatever percentage it was). I don't want the steward of my capital laughing about something like that. It is definitely not funny to me.

Also, the sheer size of some of these investments makes it highly unlikely that they can achieve high rates of return over time. Yes, Alibaba was a huge home run. So was Yahoo Japan and some others. But what were their capitalizations when the investments were made? I don't think they were valued at $40-50 billion. How much money were they losing? Probably not billions. Things are truly insane these days.

Thankfully, that unicorn bubble, at least, seems to have popped for the moment.

Great Book
And by the way, the original intent of this post was about a book. I just finished  Schwarzman's book, What it Takes: Lessons in the Pursuit of Excellence and thought it was great. This is not a book you want to be reading in the company of your progressive friends (most of my friends and neighbors are progressive;  many are even democratic socialists). Even some conservatives roll their eyes at a guy who throws himself expensive birthday parties and puts his name on library buildings. But I don't care about that. Not everyone has to be like Buffett or Munger.


But what I can say is that after all these years on and following Wall Street, I've mostly heard good things about Blackstone. When they IPO'ed, I followed closely and it was clear that they are a really well-run shop. At the time, Fortress Investment Group was the other private equity firm to go public before Blackstone, and I was really not all that impressed after following them for a while. Their performance was not great, hedge fund was not doing well etc. But Blackstone was at a totally different level.

Whether its their conference calls, presentations, it was all done very, very well.

The only reason I never bought the stock was that, like others, I was worried about the huge increase in AUM at all of these alternative asset managers. How are they going to maintain the high rates of return with ever-increasing AUM and ever-increasing competition, not to mention the corresponding ever-increasing prices? Schwarzman, in the book, makes the case that size has become an advantage for them; they get first call (or are the only call), often because they are the only ones that could close a deal of certain sizes.

I had the chance to grab some shares at under $4.00 during the crisis, but then there were many other things that were cheap too...  But still, knowing what a solid shop it was, I shoulda grabbed some shares then. I guess one rule should be that any time a well-run company is trading for the price of an option, one should buy at least some shares!

Special Situations Trade
By the way, I should also mention that these private equity firms are in the process of converting from partnerships to corporations; this expands the range of potential buyers (institutions that wouldn't or can't own partnerships), which would serve to increase liquidity and most likely valuations of these companies.

I know many of us berk-heads think private equity is nothing but leveraging and cost-cutting, but I still think these guys have a high quality shop.

Persistence
One thing that surprised me was how hard it was for Schwarzman / Peterson when they first started up, sending hundreds of letters to investors with no response, visiting potential investors and getting rejected for months on end. This reminded me of what Barbara Corcoran said in an interview once. The interviewer asked her what the difference between a good broker and a bad broker was, and she said the great brokers know how to take 'no'. If they can't close a deal, they move on to the next one and keep going. The bad ones aren't good at taking 'no', and it wears them down; they get discouraged and it impacts them too much to keep going.

I'm sure we've all seen examples of this. A friend once told me a relative wrote a novel, sent it to a publisher and it got rejected and they gave up writing and blames the over-commercialized, corporate-controlled, dumbed-down American culture for their failure as a novelist (and the friend agreed with that). I was a little shocked. So you write one novel, send it to one publisher, it gets rejected and it's all over? Well, I don't know anything about writing novels and have no idea how that world works, so I didn't say anything.

But I was thinking back to the many famous novelists who kept getting rejected from publisher after publisher, writing story after story before getting published. I think Haruki Murakami got published on his first try, but those are probably rare cases.

Going back to Schwarzman, even with his credibility / reputation (and Peterson by his side), they struggled to get Blackstone off the ground. You can imagine how much work it's going to take to get anything done without that sort of advantage.

Having said all that, it is an autobiography so we hear everything from his side. I'm sure there are people with tales out there somewhere he doesn't want told (and this goes for someone like Buffett too!).

But, it's still a good read. 

The Problem With "Sum of the Parts"

A version of this essay appeared in Oddball Stocks Newsletter Issue 26. Stay tuned for the upcoming Issue 27 in about a month.

In a finance Twitter discussion about investment theses that revolve around sum-of-the-parts (SOTP) valuations, one astute person pointed out a big problem with these SOTP ideas: the “sum” rarely subtracts the net present value of the corporate overhead.

We have been seeing this problem with a lot of Oddballs recently. For example, Pardee Resources is focused on (mis)-allocating capital to new investments to justify their high SG&A expense, rather than selling timberland at once a millenium high cash flow multiples, cutting SG&A, and buying back stock. The result won't be pretty. Pardee's SG&A expense, meanwhile, is almost $7 million. Is this a perpetuity paid to headquarters staff? What is the appropriate discount rate to capitalize it? Whatever variables you plug into the calculation, the NPV is an unfortunately high fraction of Pardee's asset value.

Or take Avalon Holdings, which we have written about in the Newsletter before. The market capitalization of $7.8 million is only 21% of the book value of $37 million. Avalon is cheap relative to book value, but its assets don't produce much in the way of earnings. The balance sheet shows $73.1 million of assets (of which $46.8 million is property and equipment) financed with $13 million of debt, $21 million of current liabilities, and then the shareholders (and non-controlling interests') equity. These assets only produced $51,000 of operating income (EBIT) for the first six months of 2019!

The pattern at Avalon is that the company has been acquiring properties (like the Boardman Tennis Center last year for $1.3 million) and putting them in a vehicle whose equity trades at 21 cents on the dollar (of book value) and where the cash produced is eaten up by SG&A expense.

In general, these companies at discounts to sum-of-the-parts values (but not cheap based on dividends or cash flows) are suffering from an incentive alignment problem. Managements could stop buying assets, sell overpriced (i.e. low earnings relative to purported asset value) ones to third-parties, and return capital to shareholders. But managements need to own assets to justify being paid. And managers with bigger empires get paid more. (See our post, Small Companies (like Small Banks) As "Jobs Programs".)

With valuations at all-time highs and interest rates at all-time lows, there has never been a better time to sell assets and probably never a worse time to buy them. In Issue 26 of the Oddball Stocks Newsletter, one of our guest writers pointed out reason for the problems at diversified holding companies run by "capital allocators". We are at a cyclical extreme in what people are willing to pay for income generating assets, which explains the dearth of attractive “opcos” for capital allocators to buy. That is ultimately why the book value of Enterprise Diversified dropped to $10.7 million from $19.4 million a year ago.

We continue to see Oddballs – whether land-heavy companies, small banks, or other kinds – that trade for prices below liquidation value if managements sold and yet above the present value, at a reasonable interest rate, of the distributions that shareholders will likely receive over time.

Another problem we see is that investors have abdicated from supervision of their hired managements. Frankly, they are too cheap to engage in “activism” (as shareholder supervision is now known) because they had good results in the past without having to exert control over their investments.

This too shall pass. In the next bear market, micro-cap funds established post-crisis that take too much risk, older investors, and over-leveraged companies themselves will be forced sellers of Oddball shares at much lower prices. That is when it will pay to have studied and read about these companies.

Looking at the Hanover Foods Corporation Annual Results for 2019

Hanover Foods is a classic Oddball that has been written about on this blog a number of times over the years: the original posts (parts 1 and 2) back in 2012, and an update in 2013, among other mentions.

Over the past year and a half we've been writing about Hanover Foods Corporation (HNFSA/HNFSB) pretty frequently in the Oddball Stocks Newsletter. Will anything ever change there? Will value ever be realized? Both of its classes of stock have been in a slump and are back to where they were in 2011-2012. (Of course they have each been paying a small dividend of about $1.10 annually along the way.)

The annual report for the year ending June 2, 2019 just arrived in the mail. The market capitalization is now about $60 million, compared with net current assets of $127 million and common shareholders' equity of $229 million.

The common shareholders' equity is now $320 per share. This is up from the $250 per share when the idea was first written about on Oddball Stocks. Even ignoring goodwill and intangible assets the book value would be $309 per share - almost four times the price of the nonvoting A shares.

However one of our concerns has been that the Hanover business seems to be deteriorating. For this fiscal year, gross profit was $31.8 million, down from $40.8 million the prior year - a decrease of 22 percent. Operating profit dropped from $7 million to only $354,000.

Looking at the cash flow statement, the company had $17 million of depreciation and amortization over the two most recent fiscal years, but spent $25.3 million on purchases of property, plant, and equipment. That $8 million dollar difference was paid for essentially by liquidation of inventory over the most recent fiscal year.

Why was Hanover's profitability so poor? We know from the report that frozen and canned vegetable sales were up a little bit, but snack sales were down from $51.6 million to $44.6 million. Perhaps this segment was higher margin. It seems to consist of snacks like pretzels and cheese balls.

The annual report mentions that last June the company impaired the full amount of the goodwill associated with its snack foods reporting unit. Hanover also "ceased operating its direct store delivery business," resulting in an additional impairment of $2.1 million of intangible assets. These noncash charges drove up administrative expense and so are responsible for a fair bit of the year-over-year decline in profitability.

Hanover's business just seems to be in steady long-term decline. Between 2000 and 2004 sales were lower than today but gross margin was much higher, resulting in some decent profits. Hanover's market capitalization probably wouldn't be $60 million if it were still earning $10 million like it did in 2003 and 2004.

From 2000-2004, Hanover earned an average net income of almost $9 million: higher absolute profits on revenues that were only three-quarters of the current levels. One wonders how much of the declining profit margin is secular business decline and how much (if any) is coming from excessive insider compensation or expenses being run through the business.

On the plus side, since the market capitalization is only 26% of its shareholder equity, the low return on equity transforms into a shareholder earnings yield almost four times higher. (Of course there is the risk that the current, low profitability levels will deteriorate further or become losses...)

We have seen in the past that “one-day” good events can happen for shareholders of companies where the market price is too dislocated from asset values. And we have also seen low returns on equity turn into respectable IRRs for shareholders who buy in at very big discounts to book value. And one other thing worth mentioning – Hanover was probably the most hated Oddball at our Newsletter meetup this year. There was only one gentleman willing to raise his hand to say he had not given up on it!

We have written about Hanover in a number of recent Issues of the Newsletter (back Issues are here) and will continue to do so going forward.

Bubble Yet?

Bubblicious?
People still speak of bubbles a lot, bubble in the bond market, stock market, unicorns etc. But I still don't really see a bubble except in certain areas of technology. Otherwise, things seem to be in a normal range to me, except interest rates. They do seem a bit low, but having said that, I still see 4% as a decent 'normalized' long term rate for the U.S. (as I have said here before many times).

The Valuation Sanity Check shows the Dow trading at 20.6x current and 16.4x forward P/E,  and the Berkshire portfolio (largest holdings) trading at 17.4x and 14.3x their current and forward earnings. Browsing down that page, there is nothing really alarming about anything, really. Some things look expensive, but nothing insane.

Also, here are some charts I plucked off the internet. The first bunch is from the JP Morgan Asset Management's Guide to the Markets. This is a nice report that they put out every quarter, and is fun to flip through. 

These charts too show nothing really crazy.

I keep hearing people talk about how crazy it is that the market is up 20% this year, but given that a lot of that is recovering from losses last year, it doesn't sound crazy to me.

Also, people keep saying that the returns of the last 10 years suggests the market is overvalued. But again, given that the much of the returns is recovering from the financial crisis bear market, I think it's irrelevant. If the market had double digit returns over 10 years from a market high, then I would be more inclined to agree; something bad might be about to happen.

But this is clearly not the case here. In fact, from the October 2007 high, the market has gone up less than 6%/year (excluding dividends), and 3.4%/year since the 2000 peak. This is hardly the long term performance figures you see in a real bubble.

I won't look for them, but look at the similar figures for the 2000 peak, Nikkei 1989 peak etc. It is very different from today.




S&P 500 Index Forward P/E Ratio

The above forward P/E chart shows a normal range, nothing alarming. Of course, people will argue that the market has been consistently overvalued for the past 25 years so this is not indicative of anything. But interest rates are a lot lower now than in the past too, and this chart doesn't show any abnormally high P/E level due to lower rates. I suppose one can argue about the validity of EPS estimates a year out. That is certainly a valid point.

Forward P/E and Future Returns

This X-Y plot of forward P/E ratio versus future returns show potential returns solidly in the positive. I did something similar using Shiller's CAPE ratio and found similar results.

One year forward returns based on P/E

My analysis goes back to 1985, so is longer term than the JPM study (which goes back to 1994), but hasn't been updated (a couple of years shouldn't make a difference!).


MSCI World vs. S&P 500 Index



These charts show nothing extraordinary either. Yes, the U.S. market is doing really well versus the rest of the world. But who cares, right? Unless you are some sort of mean-reversion trader, it's not really relevant. I too tend to like investing in U.S. businesses, mostly because I live here and have access to all the filings, conference calls and things like that, and I do feel U.S. companies are more responsive to shareholders and the system works better (compared to Japan, for example, where I have very little faith that managements care about shareholders).

Median P/E Ratio
And here's something I found. The S&P 500 is market-cap weighted, so the index P/E ratio tends to be influenced by the large cap stocks. When you have a bunch of large caps that are overvalued, it tends to push up the P/E ratio of the whole index.

To get a more 'typical' P/E ratio of the random stock, a median P/E can be more useful, as half the companies would be more expensive, and half would be cheaper than this level.

I found this chart in Yardeni's September report: Yardeni P/E report

Here's the median forward P/E ratio:


Again, nothing spectacular here. Looking at this (and the other charts), if someone is net short the market, you would have to examine their brains. Why would anyone be net short in a market like this? It doesn't really make sense to me.

Just flip through these charts again, and imagine you are the head of the trading desk at a hedge fund or bank somewhere. And say some guy is massively net short the market. You ask him why he is so short, and he tells you that it's because the market is way overvalued. What would you say? Would you feel comfortable going home and sleeping well? Of course, this trader may contribute to reducing the overall exposure of your desk, but don't think of it that way as you can always adjust your market exposure with futures.

If you think of it this way, it's sort of insane.

The other non-bubble thing is that you don't hear people talking about the market at all. Usually, in a real bubble, people really like to talk about the stock market in situations where that is not normal. A couple of years ago, everyone was talking about bitcoin. I don't hear much about that anymore these days.

Also, the news flow is so negative these days, whether it be Brexit, Trump tweet, U.S./China trade, Iran... Wherever you look, it's just bad, scary news. And yes, the market responds by going down, but it comes right back up. This is not to say that the market will always come back up. We will have a bear market at some point.

But if you are net short and all these 'favorable' developments to your position is not making you money, that's kind of a serious problem.  What happens when any of these things resolves itself? What if we do get a blowoff that has happened in most other bubble tops (2007 top was not really a bubble in terms of valuations, so bear markets can happen from normal valuations too).

Value-Growth Gap
The other thing is the huge gap between growth and value stocks. I am not that big a fan of this as the division seems arbitrary and kind of meaningless. But what is encouraging is that despite this slightly higher valuation of the overall market, the gap between value and growth seems to suggest that one can avoid a lot of pain by being more in the value area than growth.

Back in 2000 when the market was actually really overvalued, value investors did fine despite a 50% drop in the S&P 500 index as the drop was driven mostly by expensive companies going down in valuation. I think value stocks actually went up back then.

This may be true this time around too.

Market Timing
Most of us value investors don't believe in market timing at all. It is so amusing to watch the market go down 200 pts (or more) on a tweet only to reverse itself within a day or two by another tweet. Why anyone would trade based on this stuff is beyond me. I am a believer that headlines almost never mark turning points in the market. If the market is making a new high and then plunges on some negative headline, you can bet that that high will not be a high of any significance. I have seen various attempts over the years to analyze peaks and troughs in the market and matching it with news headlines; there usually is no headline that marked the top or bottom of a market.

It's just silly to try to figure out when the next bear market will happen.

There is one thing, though, that I would watch out for. If the U.S. market goes into a situation like the Japanese stock market in 1989, then I would obviously react. I would definitely lighten up equity holdings (still on a case-by-case basis based on valuations, of course) and maybe even consider buying puts, going short or whatever (OK, maybe not as I watched many bears lose a lot of money in 1998-2000 period only for them to be proven right but already having lost too much money made no money on the decline).

In any case, it would be a valuation call; I would lighten up when I can't accept the valuation levels. And it would be by each individual holding, not some vague notion about the directions of the overall market or economy.

Japanification of Markets?
The other worry is the Japanification of global markets. We were all baffled by the low interest rates in Japan for decades, and here we are with multiple countries and trillions of dollars in debt trading with negative interest rates.

Many commentators thought it won't happen here, and yet here we are with long term rates under 2%.

What about the stock market? Can the U.S. go into a bear market like Japan's that lasts 30 years? This sort of thing worries me too a little. We can't say it won't ever happen here as we were wrong about interest rates. Well, I've actually been in the camp of "lower for longer" so am not really all that surprised by how low our interest rates are.

But it would not be fun if the market went into a 30-year bear market.

Here's why I don't think it would happen, at least any time soon:
  • The Japanese market went up to 60-80x P/E at the time. That sort of valuation takes decades to grow out of, and it's that much harder when there is no growth! We are nowhere near that kind of valuation
  • The Japanese government and companies spent most of the time since then hiding things rather than fixing them. When the U.S. had a credit crisis, banks were encouraged to raise capital and fix their problems, not hide them. 
  • Regulations are meant to maintain the status quo, protect large companies (who are contributors to the LDP) etc.
  • In Japan, companies are discouraged from right-sizing. They run under a system the Canon CEO, Fujio Mitarai, calls corporate socialism. He says that since the Japanese government doesn't offer much of a social safety net, that burden falls to large corporations; they are strongly discouraged from firing employees. This is why there is a word for this category of employee: madogiwazoku (google it!). Here's an article about it: Boredom Room. It's no surprise that the stock market has been dead for so long with so many zombie employees at zombie companies. This is very different than in the U.S.

There are many other problems, but those are just some big ones off the top of my head... You may think of better reasons why Japan has been stuck for so long.

None of these are true in the U.S. That doesn't mean we can't go into a 30-year bear market, of course. But it just seems to me that it is not likely at the moment.

Hard Left Turn in Politics?
Others worry about the progressive left; Leon Cooperman joked the other day that if Elizabeth Warren gets elected, the market won't open. I understand that fear, and as a big fan of JP Morgan, I totally get it.

I am actually pretty progressive myself (I used to be conservative but have been moving left over time), but I wouldn't worry about this at all.

First of all, we really have no idea what's going to happen. We don't even know who is going to be the democratic candidate; it's possible that someone else not even running now will come up out of nowhere (well, not sure if that's possible, actually, but we still have a long time to go).

We do know that Warren is as progressive as she presents herself, so this may not apply, but it's possible that she runs hard left to take Sanders' and other voters only to run back towards the middle if she wins the nomination.

We don't know what she can accomplish even if elected, right? This is a president, not a dictator. Did FDR or Kennedy destroy the country? I haven't looked at the market action around their elections, but I don't really think there is a big, visible dent or bend in the long term charts based on who was president.

So this is certainly a risk factor, but my guess is that things, as usual, will not turn out the way we expect even if Warren wins the election. It's a complex model and things aren't going to be so easy to predict.


Vulcan International Corp. Timberlands Listed for Sale!

A fellow Oddball sent in a new development for Vulcan International, the previously mentioned (in 2015 and 2018) Oddball that announced plans to liquidate last year but has not announced any progress with the liquidation or paid any distributions.

One of the company's assets is 14k acres of land and timber in the UP of Michigan. This has been placed on the market, with bids due on October 11th:
THE OFFERING
American Forest Management, Inc. (AFM) has been retained to solicit sealed bids for 14,306± gross GIS acres of land and timber located in Houghton and Ontonagon Counties, in Michigan’s Upper Peninsula. This high-quality property will be offered for sale in its entirety as a lump sum, single-phase, sealed bid event. Offers will not be considered for individual tracts.

THE PROPERTY
Vulcan is located about 25 miles south of Houghton in the area of Twin Lakes. This property is known to be a well-managed, high quality Sugar Maple forest. The Upper Great Lakes Region has numerous markets for many forest products, and Vulcan is well-positioned to take advantage of these markets. The property has an improved road system throughout, allowing for both summer and winter harvesting with little immediate investment. The productive acres of the property are better than average with less than 1% being non-forested.

DATA ROOM
AFM has set up an electronic data room containing information for bidders to use as they evaluate the property. Access to the data room will be permitted only to prospective bidders who have executed a Non-Disclosure Agreement (NDA) as approved by AFM. The data room will be accessible to such prospective bidders starting on August 30, 2019.

OFFERING PROCESS
Vulcan is being presented for sale in its entirety, as a single stage, lump sum sealed bid event, with no further option to subdivide. Prospective bidders are invited to participate in the process upon execution of the NDA. Final bids will be due October 11, 2019.
There is also a short video of the Vulcan land with drone footage.

Lately the share price of Vulcan has been declining. It peaked at $140 last October but has dropped to $120, possibly reflecting concern about the lack of updates on the liquidation.We know that shareholders have been contacting the company and at least one sent a formal Section 220 request for information about what is going on.

(P.S. The timber sale will also be interesting because the value it puts on northern Michigan timber will be helpful in thinking about what Keweenaw Land Association's timber is worth.)