USG and why the home builders may not be good shorts

There is an interesting discussion going on in the comments section about why the home builders may not be good shorts.

walter said...

when will the housing long be played out? as you mentioned, it was a while back when the whole world was down on housing - but it never went down...

sooner or later, bulls will have to take profits - what would you look for?

you dont think its too late to get in on the long side?

8:44 PM
Pradeep Bonde said...

In my understanding of the market there are basically three types of investors growth, clueless and value. Each one has a different perspective and time horizon. The homebuilders are shifting hands, the value funds are buying them. They hold it for long time. There is huge amount of capital invested in value strategy.

The other thing is there will be private equity groups willing to buy out homebuilders if they go down further. Warren Buffets kind of investors would step in to buy them if they go down further. So essentially the value types will put a ceiling on any down ward moves.

So the home builders will probably spend 2-3 years stuck in range around these price levels.
Some of them will go down. Some will be bought, some will merge.

The clueless are the shorts who think homebilders are like dot com companies. Some are still short. With all due respect to Doug Kass, he has pounded the table on housing stocks short for third time. Previous two times he did it, the stocks went up. Selecting shorts is never an easy task even for the pros.

There might be a short trade possibly developing in some of them as some will probably revisit the bottom of the range.

Frankly I think there are better risk reward shorts than homebuilders in this market. But that's just my opinion.

4:58 AM
walter said...

agree - why short them now? the big gains to be had are gone...

thanks - shorting comes easier to me, so i look for shorts regardless of the overall market... that being said, i need to be reminded, from time to time, about the market mechanisms like value investing, etc.

8:23 AM
Pradeep Bonde said...

In my experience so far, to pick good shorts , you have to pick the sweet spot between growth and value.

Growth stocks sour and the growth crowd starts dumping them. The value crowd waits for it to reach their target valuation zone as they want to buy dollars worth of assets for few pennies. There is significantly higher asset allocation to value than growth.

The growth crowd chases the new , new thing while the value guys believe in holding for eternity.Growth crowd looks at 52 week high, value crowd looks at 52 week low as buying opportunity.

Easy money on short side is made shorting when you can catch some part of this transition.

But like in long it ultimately boils down to equity selection. Rest is all tactics..

8:44 AM

Look at USG, to understand how this growth and value game works. Warren Buffet is increasing his stake in USG. It is near 52 week low. Prospects for home building suppliers are supposed to be bad. Now what does he know that housing bears do not know. What is wrong with him. He should read The Apprenticed Investor series.

Probably he is drunk. I think he drinks too much Cherry Coke!!!

USG Corporation (the Corporation), through its subsidiaries, is a manufacturer and distributor of building materials, producing a range of products for use in residential, non-residential, and repair and remodel construction, as well as products used in certain industrial processes. United States Gypsum Company (U.S. Gypsum) is a wholly owned subsidiary of the Corporation. The Company's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 54%, 12% and 34% during the year ended December 31, 2005


walter said...

Let's get back to Nouriel Roubini...

You mentioned him a while back. I keep with the free portion of his blog. He called the payroll numbers recently. He's seems to be dominated by dooom and gloom, but you have to admit that he backs it up with data - he's not pulling this stuff out of the air.

I feel that becacuse I prefer shorting (just comes easier to me and has been more aestheticaly pleasing, not to mention financially pleasing), that that makes me the ultimate contrarian, given the market's upside bias - everyone wants it higher!.

That being said, i appreciate contrarian views, on whatever time horizon. you often point to the bearish sentiment on important and influential stock blogs. I have gotten the impression that you are way less negative than someone like Nouriel Roubini because of this pervasive negative sentiment. if i am correct, what is your take on the "numbers" that Nouriel Roubini references? know what i mean?

Pradeep Bonde said...

I have been reading him for long time. Currently he is in the doom and crash camp. In fact he has become so frustrated that I believe he is losing his objectivity. There was a major shouting match on his blog recently which I think got edited. When analyst starts abusing contrary thinkers, be careful.

My current view is we are stuck in range and will probably remain so for long time. Some of my thinking is based on earnings trend analysis and part based on different intepretation of history than the bears are making.

It has been my obsevation that people once burned do not repeat same mistakes again for long time. Top management in most companies was badly burned by the dot com crash and hence are very careful. There are no major excesses on corporate side like over investment, or over hiring, or unrelated diversifications, or crazy mergers. In fact corporate balance sheets are in much better shape.

The other hypothesis I have is capital has become a commodity. Which in a way is deflationary. Getting business funded is not so difficult. So there is intense competition and hence the inflationary pressure will subside.

Now all this macro thinking does not realy affect my investing, because 80% of my returns are based on stock picking strategies.

In fact I would love a serious crash or burst, as it would offer many opportunities.

Most of my rant against some selected analyst is because, they are clearly misleading clueless investor. They are talking about things which are absolutely wrong, not supported by data and may be injurious to many investors. I may not be able to reform the world but I atleast try in a small way by pointing out flaws in their thinking.

walter said...

its things like this from the http://www.rgemonitor.com/blog/economonitor that make me think everyone is too bullish and damn, look at the vix - who's bearish out there?

Robert Rubin had a long conversation with Citigroup economist Kim Schoenholtz on September 7, which has now been transcribed and released as a special report from Citi's Global Economic and Market Analysis group. Rubin's pretty downbeat about both the global economy and global markets, which he thinks are sticking their collective heads in the sand:

Most people seem to think that the problem is somewhere down the road. I think the markets are remarkably complacent.

Even economists, who are generally more bearish than markets, aren't necessarily bearish enough, says Rubin:

It’s curious to me that economists, with an exception here or there, are as sanguine as they seem to be. They talk about a cooling off or a soft landing or whatever it may be, but generally seem to attach very low probabilities to really serious adverse developments.
Most of the people I know in the national security world, and there are many, seem deeply troubled about a variety of matters: nuclear proliferation, Islamic radicalism, the endgame in Iraq, instability in countries that mean a great deal to us in the Middle East, what’s going to happen in Pakistan, and many other issues as well. And the markets do not reflect this.

He also doesn't think the IMF or anybody else will be able to prevent any kind of unstable global rebalancing:

I don’t think there’s a mechanism for international policy coordination. I really don’t. It’s a very good question actually that has come up in a lot of conversations. I may be wrong, but based on my experience, I would say that there’s no mechanism for international policy coordination. There’s a pretty good mechanism for telling a small poor developing country what to do. But there’s no policy mechanism for bringing together the countries that really matter in the global economy.

To all of which there can only be one reaction: Sell! Sell now!

Pradeep Bonde said...

If you have noticed, I have been bearish since yesterday. ;-)

All these things might be correct, but ultimately it all boils down to timing and probability of actualy things happening. I give a low probability to Iran, Korea, Iraq and Pakistan problems.

Timing after equity selection is the second most criteria. That is the million dollar question, when will it start impacting?

walter said...

agree - timing is everything...

i also agree that geopolitics wont have big influence on markets, at least until the elections are over.

although i do believe current power holders will try to scare electorate with north korea

Pradeep Bonde said...

Here is some interesting perspective on The Great Leader and games he is playing.
When North Korea Falls

The US mid term elections have been globalised. All the parties Korea, Iraq extremists, Iran, Osama and all the other sundry tin pot extremist want to time their action to create great impact during elections. It is all one great poker.

walter said...

will check it out...