On Tops and Bottoms

The day before the private equity monster Blackstone's (BX) IPO I wrote "If there was a huge upside to these folks I do not think they would be cashing out and subjecting themselves to all the increased scrutiny a public company goes through.

I will stay away..


Shares, after hitting $37.98 immediately after they began trading have slowly receded and now sit at $29.92 for a 21% decrease in 4 trading days. Do I have a crystal ball? No. This one was easy, when billionaires decide to sell us common folks "a taste" it is usually only because they see more up side in selling it to us that keeping it for themselves.

Carl Ican, in an interview on CNBC yesterday said when asked about private equity "easy money and cheap deals are going away and this will severely impact earnings at private equity". When you add the specter of a tax increase from 15% to 35% on these entities, it is no wonder they are racing to cash in before we all realize they are due to earn much less in the immediate future. This probably also explains why the other private equity IPO, Fortress Investment Group (FIG) which began trading at $31, now sits at $23.25, a 25% loss.

In 1999 and 2000, everywhere you went the talk was about the Nasdaq, tech stocks and the internet. The level of people who made a living "day trading" from their bedrooms skyrocketed. Shares of companies like Yahoo! (YHOO), Dell (DELL), EMC (EMC)and Cisco (CSCO) all were household names that traded with valuations in the stratosphere. When your mailman, paperboy and the 16 year old kid bagging your groceries are talking about the next tech IPO and how it should double the first day, you need to take a step back. When they are throwing around terms like "click through"', "routers", EBITDA and have no idea what those mean, be very afraid. Not long after the market began a two and a half year slide that the Nasdaq has still not recovered from.

In late 2003 people had finally had it with the stock market and accounting shenanigans and began flooding the real estate market with money. Stock valuations, despite an improving economy and growing earnings hit low levels not seen in a long time. The same mailman, paperboy and grocery bagger were all now talking about how stocks are a losing game and that the market was "rigged". This of course signaled the bottom of the market and stock have climbed steadily ever since.

In early 2006, the number of real state agents in the US hit an all time high. Filled with sugar plum visions of real estate riches, potential agent flooded the market to get in on the action. This of course signaled the top of the market and real estate values (and the number of active agents) have plummeted since.

So where are we at today? Housing. It has to be near a bottom. I cannot pick up a newspaper, watch TV or go anywhere with hearing about the "awful" real estate market. Yesterday I was in BJ's (BJ) and listening to a conversation between a 70 year old women who I was behind in line and the kid at the checkout. They of course were chatting about housing as he rang up her groceries and throwing around terms like "subprime mortgage meltdown" and "foreclosure rate". When it was my turn to check out, I asked "what is a subprime mortgage"? The reply came with a look that could only imply I was quite possibly to dumbest person on the face of the earth. He said "it's a mortgage that is not prime".

Right.... smells like a bottom to me


Is it today? Tommorrow? Next month? Who knows, but it is near. How to play it? Home builders are a tough one. Valuing individual companies gets into a lot of guesswork based on the value of their landholding and the demographics of the region in which they do business. Also, they may make a sale today that gets canceled in three months that causes an earnings outlook revision. If investing here I would look at the iShares Dow Jones US Home Construction ETF (ITB) that began trading in May 2006 (another sign of the top) and is currently down 35% since it started. The index is a free-float adjusted market capitalization-weighted index. It measures the performance of the home construction sector of the United States equity market and includes companies that are constructors of residential homes, including manufacturers of mobile and pre-fabricated homes.

It will give you exposure to the whole housing market and avoid the individual companies potential pitfalls.