It’s a Weird World

“What goes up must come down.”

― Isaac Newton

Rarely has this idiom been more accurate than in describing this past week on Wall Street.  But the fear and bloodletting in the streets got me thinking – which is dangerous in and of itself.  What if the usual suspects are not at fault?
This is not to imply that China or Greece or Puerto Rico don’t have a hand in stirring this kettle of fear.  They do.  Or the Feds inaction on interest rates doesn’t play a part.  It does.  What if the volatility is a result of Activist Investors – or if you prefer a term from yesteryear – Corporate Raiders?
A stretch perhaps, but a plausible theory.  Let’s look back in history a little.  Once upon a time, there was an unwieldy beast by the name KCSU.  One day it was decided that shareholder value could be unleashed by splitting into three.  DST and JNS (Stillwell) arose from the ashes.  In the short term value was unleashed at a cost of increased volatility.  There was a counterbalance in place offsetting business cycles between Industrial (rails), Technology, and Financials.  A similar argument could be made in keeping Frito a part of Pepsi (although YUM was also once a PEP company).  Finally look over at the oil patch.  The split between pipelines, refineries and drillers has resulted in weaker companies/partnerships less able to weather the storm.
One way to play a contrarian is to hold the spinoffs.  My portfolio continues to hold PEP/YUM, KSU/JNS/DST, KMB/HYH, BAX/BXLT and ADP/CDK.  Another concept on the same idea I recently completed on AMC/EPR.  Going forward, my holdings will be allocated at 10 shares AMC to 1 share EPR.  This approximates the value of AMC’s former real estate now owned by EPR.
It is kind of food for thought …
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Regional Bank Investing

I just read John Maxfield’s article titled The Best Argument for Buying Regional Bank Stocks on the Motley Fool.  The article reasons that:

  • The Riegle-Neal Act prohibits mergers if the combined companies’ deposits exceed 10% of the total deposits nationwide, and
  • systematically important financial institutions must retain an additional “SIFI buffer” of as much as 2.5% of risk-weighted assets (reducing their profit potential)

For these two reasons, the rationale is that Regional Banks are a better, more profitable alternative.  John also highlights two banks worthy of consideration, BBT and PNC (two more if the comment stream is considered, NYCB and MTB).  Insofar as the analysis goes, I concur.

However, with Dodd-Frank, there are additional layers of resistance when the combined entity is larger than $50B.  In fact, CIT’s merger with OneWest this week was the first of this size approved post financial crisis.  Pending are BB&T’s acquisition of SUSQ and MTB’s (still) of Hudson.  All of John’s candidates would reside on the side of being an acquirer.  Not likely as PNC is shedding some branches.  Even so, the real money is in the realm of being acquired.

The key is to identify common metrics surrounding these mergers.  I’ll keep you informed if and when I find them.