November 7, 2016

Markets were very strong on Monday as most investors decided that the end of the FBI’s email investigation, announced Sunday, means that Clinton is more likely to win. The S&P 500 was up 2.2% and Toronto was up 1.0%.

Most stocks were up today.

I am looking forward to the upcoming Q3 report from Melcor Developments. I believe that the market has overreacted to its decline in earnings. Melcor is in the cyclical business of selling home building lots. This is a business that can withstand a decline in sales better than most business. When lot sales are down Melcor can cut back on “production” of lots (development of raw land). Is contracts out the physical work of development and therefore its costs are variable in that regard. It can hang onto developed lots and sell them later. It does face carrying costs on money tied up in unsold lots but it is able to do that. Clearly, lower lot sales is quite negative. But I don’t think it justifies the shares trading at less than half of book value.

Melcor may also report mark-to-market losses on its investment properties. This would be a partial reversal of the gains it has booked in recent years.

Overall, Melcor’s earnings report is likely to weak, and its near-term outlook is also likely to remain weak. But I believe the weakness has already been over reflected in the stock price.

Toll Brothers continues to expand and today announced the acquisition of small home builder.

It’s interesting to see how Berkshire’s earnings were reported in the business press. The early and less informed headlines focused on the 24% drop in GAAP earnings. The later reports were more informed and focused on the 7% increase in operating earnings. One report speculated that lower investments gains were due to a decline in Wells Fargo. This is completely uninformed since changes in the value of the stocks of companies it owns are not reflected in GAAP earnings. From my perspective it is a very good thing that some investors and analysts greatly misinterpret financial reports since it can lead to mis-pricing of stocks resulting in better buying or selling opportunities.