More than the Mainstream: Greater Fools
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It looks like the real estate bubble is back! I just got back from a conference where the CEO of Meritage Homes, Steve Hilton, was bragging that Phoenix home prices were going up 2% a month. He told investors that the cash on his balance sheet would go down as he buys more lots. He doesn't want to miss the boat on this boom. Then I saw this article in the Washington Post.
One Maryland couple beat out the competition by agreeing to adopt the seller’s dog.
Obviously if you believe in fundamentals (defined classically) this will end with another crash. The government is now guaranteeing 9 of 10 mortgages compared to 3-4 out of 10 in the previous bubble.
Can they guarantee 11 out of 10 mortgages? Probably not.
The question is—how can you make money for your investors? Some will be buying shares in the believers like Meritage and hoping they can sell their shares to the "greater fool." I think it's best to look for shorting the believers when they are at the peak in their delusional denial.
That, of course, requires patience.
In the first bubble I shorted Bankrate and followed Ackman on his short of MBIA. I am looking around for new candidates now. This time around it is a little easier as I have the blogosphere to explore.
It is not a coincidence that the best blog I found covering the “most bubbly” of real estate bubbles is called Greater Fool. The only difference this time around is the domain suffix —it is a .ca. That's right, the most delusional housing pricing is in our formerly prudent neighbors to the north, Canada; and Garth Turner's blog, Greaterfool.ca, is the best chronicler I have seen. He is a scene-setter as well as an analyst. Take a look at the introductory paragraph of his recent post, “Brilliant:”
It could be small-city Canada, anywhere. Manufacturers have dried up and left town, and the population’s shrinking a little. But that hasn’t stopped condos from erupting like concrete mushrooms in recent years or the burbs from expanding. There’s the usual highway strip running through the heart of the place with hotels, bars, car dealerships and malls, plus the usual stores—Staples, Best Buy, Wal-Mart. The old downtown is still alive, but tattoo places now brush up against the mutual fund sales shops. Never a good sign. Gives tats a bad name.
What is great from an American's perspective is that all of the characters that we saw in the US housing bubble are up there in Canada leading the lambs to the slaughter. In another awesome coincidence the main villain is named “Brad J. Lamb.” Turner has a great characterization of Lamb, whose nickname is the “Condo King of Toronto.” In Turner's post “Smart A** Condo Math” Lamb is described as [amassing] significant wealth, and works at showing it. His rise from sales guy flogging cheesy waterfront boxes two decades ago to developer deity, TV star, and the coolest guy in the room is legendary. But lately there’s more than a tinge of desperation in his message. His weapon against a gathering storm of fear is simple. Greed. For Brad Lamb knows, greed works.”
Lamb reminds me of some sort of motley blend of Angelo Mozilo and Donald Trump. Lam is encouraging people to lever up their primary residence to go buy a second, third, or fourth piece of real estate as an investment.
Going through Lamb's obviously foolish math in Turner's post makes me think that ultimately shorting the mortgages on Lamb's projects will be a money maker in time. Just like in the US, eventually people realize there are no more greater fools and the bubble bursts. I want to be ready.
Aram Fuchs, General Partner, Fertilemind Capital, is captivated by the ability of the Internet to change buyside research. He founded a website called Capitalist Collective, where he invites finance professionals to share their research and learn from others.
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