Market Commentary

You know to me this is looking more and more like last September. Last September you could not pick up a paper or listen to a speech without hearing how bad it was for homebuilders. At that point homebuilders had fallen 40 to 60% depending on what homebuilder you looked like. I had covered my homebuilding short in July and was content to sit on the sideline. Well everyone was so negative and homebuilders put on a very very impressive grinding type rally to February and climbed 20% to 40%. Since then they have dropped another 30 to 50% (some much worse).

Fast forward to today. Everything I am reading is bearish. The markets can not go down substantially when everyone is bearish. It is perverse logic but time and time again when market sentiment is overly bullish the market has a hard time putting together a huge push upward and when everyone is severely bearish the market has a hard time going much lower. I wonder if the market does not grind up for awhile (my official guess which is worth nothing is that we do a whole lot of nothing for a couple of months) until tighter credit makes its way through the economy. The last month did what Greenspan tried but couldn't do for 2 years. Raise the cost of borrowing. Remember treasury rates went from 1% to 5% and the spread just continued to tighten and overall cost of borrowing really didn't go up that substantially. Now almost over night the cost of borrowing especially for the fringe borrowers went up 2 to 3% essentially overnight. That takes awhile to work through the economy.

I also have to wonder if this just isn't 1998 all over again with the difference being instead of a U.S. market bubble we are on our way to an emerging market bubble that has 2 to 4 years left in it. I know I would not be short China or the rest of Asia before the Beijing Olympics. Anyway that could help prop up the U.S. economy.

Either way I think one of my favorite investors Whitney Tilson said it best in this clip http://www.youtube.com/watch?v=Oih01tIS7Yc.

He said

“We value guys always worry and I put my worrying pretty close at the top of my worry range right now. I am not predicting Armageddon but if Armageddon does happen, a year from now we will look back and say we just saw the first two innings of it. This is what the playbook would look like. We are very liquid right now with 15 to 20% cash…..the best advice I can give to anybody is to stay away from what I call froth and nonsense, stocks with very high PE multiples”

Well said Whitney. Well said. I couldn't agree more.