Jason Knapp
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It's a Bad Time to Invest in Banks...Special Situation Investing News - 8/20/2015

It's funny, for months now I have seen many financial talking heads touting this as a great time to buy bank stocks.  Their reason for doing to, the fact that the Federal Reserve might finally move off of its Zero Interest Rate Policy and begin to raise rates, allowing banks to make more money, this sounds reasonable at first...however their logic is flawed.

Banks essentially make money by borrowing money at short-term rates and lending it for longer terms.  This means that the yield curve is of utmost importance to them.  What is the yield curve?  It essentially represents the spread between long-term and short-term interest rates.  The following is an illustration of a normal yield curve:

When the markets are "normal" the longer a loan is, the higher the rate of interest it pays...to a point.  So banks that pay say a 1% yield on their customers' savings accounts can then turn around and lend that money to someone who wants to buy a home via a 30-year mortgage at say 5% or 6%.  Of course, the bank assumes some risk that the loan won't be paid back, but otherwise they make money on the spread between how much money costs them and how much they can loan it out at.

Here's the BIG problem for the banking sector right now.  The Federal Reserve only controls short-term interest rates.  For the most part, the market dictates the level of longer term rates.  The Fed can raise short-term rates all it wants, but I strongly suspect that the global turmoil that we are seeing right now, from China's economic slowdown and stock market meltdown to commodity-dependent countries slashing interest rates to help keep their economies afloat, to currency wars, and on, and on...will likely keep the long end of the yield curve low.  A rise in short term rates cause by the Federal Reserve combined with continued low interest rates on the long end would cause the yield curve to "flatten." This flattening of the yield curve is terrible for banks because it limits the interest rate spread that they profit from.

Adding insult to injury for Special Situation investors like myself is the fact that the main type of investment in the banking sector that interests us, thrift conversions aka demutualizations, has all but dried up.  Check out this fantastic chart that Chris Mayer ‏@ChrisMayerAgora shared on Twitter this morning:

There's only three thrift conversions in the pipeline right now.  That's not a whole lot to work with.

Barron's actually wrote up a demutualization in its excellent Sizing Up Small Caps column this week:

Small New Jersey Bank Has Big Upside

After a thrift converstion, Kearny Financial could rise 20% as its shares catch up to peer valuations.

http://www.barrons.com/articles/small-new-jersey-b...

This is exactly the type of write-up that I look for as a special situation investor.  I should be all over Kearny Financial's stock $KRNY.  Unfortunately, the value investor in me forced me to pass.  As you can see by the above chart, at $11.50/share Kearny essentially trades right in line with its Tangible Book Value/share of $11.30.  I always like to see a much steeper discount to TBV when I invest in a bank.

And now for the rest of the Special Situation News:

Spinoffs

Canadian Solar stock plunges as spinoff plan wavers

http://www.theglobeandmail.com/report-on-business/...

Canadian Solar May Suffer From YieldCo Market Malady

http://seekingalpha.com/article/3451596-canadian-s...

pinoff Madison Square Garden beats by $0.20, beats on revenue

http://seekingalpha.com/news/2738046-madison-squar...

Yum China gets new leadership amid activist push for spin off

http://www.businessinsider.com/r-yum-china-gets-ne...

Yahoo! Activist Starboard May Be Sailing Elsewhere

http://realmoney.thestreet.com/articles/08/19/2015...

Yum Shakes Things Up In China – Could A Spinoff Be Coming?

http://www.stockspinoffs.com/2015/08/20/yum-shakes...

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SPACs

One on One with World's Greatest Living Explorer: Sven Lindblad

https://www.yahoo.com/travel/legendary-explorer-sv...

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Merger Arb

Investors Should Expect A Bid Of At Least $70 For Williams Companies

http://seekingalpha.com/article/3448166-investors-...

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Activist Investors

Cannell Capital Puts Out Full TeleCommunication Systems Presentation

http://activiststocks.com/blog/cannell-telecommuni...

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Whale Watching

Hedge Funds Target Luxury Brands

http://blogs.wsj.com/moneybeat/2015/08/20/hedge-fu...

Starboard Value Catching A Falling Knife?

http://www.valuewalk.com/2015/08/starboard-value-s...

How Oaktree Wound Up Pouring More Money Into Failing Molycorp

http://www.bloomberg.com/news/articles/2015-08-20/...

Bronte Capital Shareholder Letters: The Beginning

http://www.valuewalk.com/2015/08/bronte-capital/

Can David Einhorn turn 2015 around?

http://www.cnbc.com/2015/08/19/can-david-einhorn-t...

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Investment Write-Ups

Rayoneir Advanced Materials: High Quality That Never Was; Reviewing A Painful Mistake

http://seekingalpha.com/article/3453746-rayonier-a...

Americas’ Hottest Auto-Parts Stock Seen Rising After 100% Rally

http://www.bloomberg.com/news/articles/2015-08-20/...

A Deeply Undervalued Asset Manager

http://news.morningstar.com/articlenet/article.asp...

A Long Cigar Butt: The Hartford Financial Services

http://seekingalpha.com/article/3452696-a-long-cig...

Emerging Value Capital Management Update on Jana activist target Qualcomm

http://www.beyondproxy.com/update-qualcomm/

Genworth: 10 Reasons Why This $5 Turnaround Stock Is A Strong Buy

http://seekingalpha.com/article/3455386-genworth-1...

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Other Investing News

Insiders Buying: Hertz CEO, Others Buy $2.13M in Stock

http://blogs.barrons.com/stockstowatchtoday/2015/0...

I knew that Titanium Dioxide is garbage. Keep in mind that nearly half of Chemours' $CC revenue and more than 3/4 of its EBITDA come from Titanium Dioxide. Prospects aren't bright for the company.  Chemours to Cut Titanium Dioxide Capacity, Close Delaware Plant

http://www.wsj.com/articles/chemours-to-cut-titani...

Valeant Nears $1 Billion Deal for Maker of Women’s Libido Drug

http://www.wsj.com/articles/valeant-nears-1-billio...

The second quarter was another tough one for CafePress

https://www.internetretailer.com/2015/08/19/second...

Switching auditors is definitely not a good sign. Amira Nature Foods Engages ASA & Associates LLP As Accountant

http://finance.yahoo.com/news/amira-nature-foods-l...

Excluding REIT gain & other items, Sears $SHLD lost $256 million. Shares -4.5%.

http://www.bloomberg.com/news/articles/2015-08-20/...

I personally think that the Disney selloff was overdone. Investors Need to Completely Rethink the Way They Value Media Companies

http://www.bloomberg.com/news/articles/2015-08-20/...

2 New Star Wars Theme Parks Will Boost Disney's Parks And Resorts

http://seekingalpha.com/article/3451856-2-new-star...

Arch Coal $ACI has more than doubled in 2 sessions. Arch Coal Said to Seek Compromise With Lenders on Debt Swap 

http://www.bloomberg.com/news/articles/2015-08-18/...

Lumber Liquidators' stock surges after Cantor Fitzgerald upgrade

http://www.marketwatch.com/story/lumber-liquidator...

Lumber Liquidators Just Went from No Wall Street ‘Buy’ Ratings to One

http://blogs.wsj.com/moneybeat/2015/08/20/lumber-l...

Caesarstone Drops as Short Seller Spruce Point Targets Stock

http://www.bloomberg.com/news/articles/2015-08-19/...

United Technologies in Talks to Acquire Nortek

http://www.wsj.com/articles/united-technologies-in...

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Economics

Fed Officials in July Saw Rate Rise Conditions Approaching

http://www.bloomberg.com/news/articles/2015-08-19/...

Pragmatic Capitalism: The Fed Would be Nuts to Raise Rates

http://www.pragcap.com/the-fed-would-be-nuts-to-ra...

Why the Fed might still hike rates in September: Citi

http://finance.yahoo.com/news/why-fed-might-still-...

A delay in a #Fed rate hike until a 2016 liftoff seems increasingly likely:

http://www.barrons.com/articles/deflation-argues-f...

Likelihood of U.S. oil at $30 a barrel is increasing

http://www.wsj.com/articles/likelihood-of-u-s-oil-...

HAHAHAHA. Two years ago, Peter Schiff says oil will hit $200.

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