The Bear Case…

Before you bitch, this post hurts. It hurts because it is true. I am long nearly 100 percent and have no shorts positions.

The best thing about this market has been that it has survived. It’s really not important in hindisght, just how. It just has. Hooray. The next best thing is David Tice and Bill Fleckenstein are back in the press calling for the crash. Shit, even Cole from Blackstar (long only) and the Fly are talking about the FXP (double leverage short China ETF). Furthermore, every 401k holder now has an emerging market and china exposure allocation. Ask 10 people you will see.

If you don’t think the Chinese have been cooking the books worse than our banker friends at Bear Stearns, Merril and Goldman, you are delusional and will one day get wiped out. That day looks to be sooner than later after the meteoric rise of this year.

I am not changing my portfolio based on this rant because I am only 30 percent exposed to equities and it’s designed to be long stocks in strong uptrends. I don’t think I was ever good enough on my best days to time these things and fight the trend. Knowing that helps.

On the homefront, the homebuilders are about to implode once again. If they were going to rally off their 70-80 percent plunges, they would have. Guess what, it’s getting worse. I thought these would become a value trap for years all the way back in March , but they are not. It’s worse. There is nothing there but bad book value, getting worse. Unless my friends (who have been in the real estate business 30 years) are lying to me.

I am sitting on a pile of cash as are others in Phoenix ready to prey on the newbie builders that will be in ultimate pain by next summer. After the February ratchet in ARM mortgages, consumers will have enough fight to get them to the summer at best. They shpuld reach ultimate pain as well.

If I am right and the market discounts this 6-8 month, we could be tipping into a mess for a while.

Thoughts?

15 comments

  1. Soren says:

    Dead on I’m afraid. They question is, how long before “the crowd” stops being fooled by the pundits and analyst and start seeing the true economic realities that the US economy is facing? I get the feeling and some of the data is starting to show as well that sentiment is starting to turn…

  2. DaveN says:

    Hi HL,
    So when you say “cash”… Is that pile gaining anything? Even 4% in a savings acct? How do you like to park cash to keep liquid? Are you planning to invest next summer directly in real estate, or a stock market version of RE?
    Love your blog! Always something interesting.

  3. Howard Lindzon says:

    Fair question – thx for commenting

    I have a partner who is a lender and we always have hard money deal flow. If not, yes straight cashhhhh

    we are looking very hard at everything in phoenix now. always willing to plunge.

  4. Tim says:

    The best thing about times like this is the next move up usually provides many large trends. Just need to watch and see what develops.

    Living in Phoenix, I can’t wait for the values that will be had in the future.

  5. DaveN says:

    I had heard that the boom was over in Phoenix, and that the smart folks were moving on to ride the next booms in “pre-boom” cities in Alabama, Colorado, New Mexico, Oklahoma, Tennessee, Texas and Utah. ‘Course that info source is also a seller of said properties!

  6. maximo says:

    Great post Howard! This is not the time to be a hero. The ups and downs are sure bearish signs and the shit in China will blow so hard it won’t be funny. That’s not too say the growth won’t continue at a slower rate. It’s been a great run for a lot of people such us yourself who know how to move money fast in a profitable way…and when I look to the web for advice it’s because I don’t want to hear the stupid and reckless remarks from an asshole like CNBC’s Dennis Kneal who thinks everythig is just rosy. The guy has never run money, so what the hell is he doing giving investment advice on the tube? You are a rightous dude, Howard! And I’m posting this on my site!

  7. Bruce says:

    Dennis Kneal is Larry Kudlows gay lover … not that theres anything wrong with that

    or is there?

    I’ll leave that for enquiring minds to decide

  8. The Chad says:

    I’m in agreement, maybe a little worse than this even.

    I don’t remember exact numbers but the WSJ has been printing actual figures regarding how many billions in loans will reset *each* month for the next few years.

    The subprime loans will continue resetting at an increasing pace until March ’08, peaking at almost $100 billion resets that month. That compares to only about $30 billion from August ’07 to put it in perspective.

    Next, figure that the foreclosure process can take anywhere from 3-9 months depending on the state laws and you are in the mid to late 2008 before we are even over the hump of foreclosures.

    Now, on top of this, home values will be declining. This will increase defaults for all borrowers who bought in the last couple years as they will be upside down. This includes Alt-A’s and prime borrowers.

    The Alt-A’s also took out ARM’s and their resets don’t even peak until 2009! And there were more of these than Sub prime ARM’s.

    Bottom line is this will take years to burn off not a few weeks of ‘write-downs’ before we’ve even started.

    Other than my father being a real estate agent and sister in the title business I’m pulling all data from the WSJ.

    BTW – I’m in Austin, TX and the market is still strong but getting weaker. Mostly because buyers are scared to buy a house due to the national subprime coverage rather than actual problems like other markets have.

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  10. Howard Lindzon says:

    new york pepole have a false sense of wealth security from ridiculous valauations becccuase they have a grocer and a joe’s pizza downstairs :)

  11. Tom Gilbert says:

    Love you stuff and agree with your strategy. In bull markets innovation, strong revenue growth and earnings growth are the way to go. I do however find the above a little Doug Kass like. I guess your 100% long in your equity account but that only represents 30% of your assets. Is that what you are saying? Markets have a way of destroying every style— the father of Mo investing in the modern era is Richard Driehaus… If you don’t understand that you can be taken to the woodshed in a tough market you will soon learn the pain of Mo. Hopefully you fill your arsenal with the ability to short!

    Perma bears don’t make any money but the ability to short keeps you in the game… you should research Robert Wilson.

  12. Howard Lindzon says:

    doug kass like….pls unsubscribe :) . This blog has been immensely bullish until very recently.

    Shorting is for Frank Gifford.

  13. greenskeptic says:

    I’m afraid you’re right you Putz. I’m long on China, but your comment about Chinese book-cooking is probably the scariest truth of the lot.

    If our trusted financial stalwarts have been in the kitchen, why trust the Chinese? I mean, look at the lead paint/toy recalls. (Red paint? No, no red paint. Smirk.)

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