Investment Capitalist

The true nature of an Investment Capitalist includes the ability to implement the appropriate mechanisms available to a financier. This implies that one must be a great industrialist, speculator, capital provider, opportunistic (i.e. vulture), optimistic (i.e. venture) and everything in between. If a trader is to succumb to the mere fascination of making profits by engaging the financial markets, they will soon realize the life of a proprietary trader can be a life of extreme waste.

There is no great industrialist or capitalist undertone justifying one’s efforts. There is no Francis D’Anconia, or John Galt, or Howard Roark holding up civilization in the spirit of Atlas Shrugged. So with that said, now is the time to put on the vulture hat and start picking off some of these builder stocks.

But not before the following caveat: The broad market indexes, including Dow Industrials, Nasdaq, Utilities and Transportation are signaling significant SELL signals on my macro models. A quick study of near term fundamentals and a glance at the technicals confirms this. So it appears last weeks selling is the beginning of something more severe.

Did anyone notice that the Nasdaq high last year was a perfect 50% retracement of the entire bear market move?

Those days at the front lines of capital market chaos during the “Asian Contagion” and Russian debt default of 97-98; the Greenspan liquidity flood ahead of Y2K; the new millennium wakeup call in stocks as that liquidity was reversed when the lights stayed on; the unforgettable morning of September 11 and subsequent closure of markets around the world for several days; the assault on the Middle East which marked the bottom of the bear market; the triumph and explosion of capitalism in a post-communist world; and lastly the transition of the Central Bank Chairman immediately preceding a major financial crisis, as is the tradition of the Federal Reserve.

All of that, if it has taught us anything, surely must have trained us to know this is the time to be buying certain, deeply out of popular favor sectors. Absent nuclear fall-out, we’re not going to stop needing roofs over our head and I don’t see our colleges teaching carpentry in a mass scale.

There’s no need to get into the “fluff” that the analysts like to smother their trades with. This is pure contrarian, nothing less, nothing more.

Toll Brothers (TOL) has turned over its float an extraordinary number of times since August. A bottom has formed, in the near term at least. This sudden spike down in the sector over the past two trading sessions is going to shake weak holders out and in the process test the sub $20 price levels, down to around $18 – $18.50. I could see many reasons for one to buy a line in Toll once it goes below $20, standard caveats applying of course.

For the extremely short-term minded perspective, Standard Pacific (SPF) has been oh so tempting as of late, but equally compelling has been all the doom and gloom about SP filing bankruptcy. I’ve even had to stop reading my FT in order to give instincts a fighting chance. One might consider bids placed around $2.50 in varying sizes and prices. A quick 70% profit is highly likely but anything beyond that is just greed. Seek the safer plays in Lennar, Toll and a few others I’ll get to.

At this point, it would be wise to consider a few short positions to create more of a 130/30 perspective. One can always lift the hedge later as confidence builds. I can certainly see Ryland falling much lower from current levels. There’s an incredibly heavy short perspective on this stock, which is probably why she’s been stuck in the $25 range. A bounce in the sector should push Ryland into the $40 area. A short line built up as the sector rallies and lifts the long side from $40 to $46. The higher Ryland gets into that range, the more profitable the long side of the pair should become, and the larger the short position should get.

Look at the weekly candlestick of Pulte Homes. A great deal of price action in the tape. Then switch to the monthly and you’ll see the same candlestick in the other direction. Technical analysis is just like your average economist: “On the one hand….but on the other hand…” But this is a traders stock right now with a bearish bias but not shy to lift the short and reverse. I believe Pulte wants to test the sub $10 range but I don’t see it getting below $8. More likely a test of $9 – $9.50 then a big spike. If there’s an early rally next week instead of a continuation, the entry to this short trade can improve to the $15 area.

One particular company in the builders is Orleans Homebuilders (Amex: OHB). I was scratching my head when I read their Q-2 ’08.

The average selling price for homes delivered in the fiscal 2008 second quarter was $447,000 compared to $406,000 in the prior year period.

Strange. I wonder where they sold those homes?

Orleans Homebuilders, Inc. is a residential homebuilder with operations in Southeastern Pennsylvania; Central and Southern New Jersey; Orange County, New York; Charlotte, Raleigh and Greensboro, North Carolina; Richmond and Tidewater, Virginia; Chicago, Illinois; and Orlando, Florida.

Now it’s getting insulting. While their unit sales collapsed, their per-unit sale price went up. Come now. Why such a blatant distortion? Have they found some magic pill that turns economic principles on its head? Could it be their unsold inventory is not shrinking fast enough? They have about one year’s worth of inventory if they didn’t build another unit. If they priced them “mark to market”, ouch. Then I’m sure they would begin to default on their bank covenants, and lo and behold we’d hear about another earnings restatement, company files chapter 11 and insiders have dumped their stock in the meantime.

Hence the need to put one over on the sheep and imply people would buy this. OHB is just guaranteeing a shareholder class action to make sure bankruptcy gets the company before the creditors do, or giving the creditors an excuse to not take the company onto their books, as if their balance sheets could even handle it. It looks like the rising tides will lift Orleans Homebuilders to the $10 range at which point roll up your sleeves and observe a thermal short in the making: OHB to $0.

Back on the long side, and literally on the exact opposite side of the coin, is Lennar (NY: LEN). If the Senate has its way with the economic-stimulus package moving through Congress, companies would be allowed to apply losses against taxes paid in the previous five years, as opposed to the current two-year period.

For Lennar, this two year period has already resulted in a refund check coming for about $800 million from Uncle Sam. With the 5-year look back, it’s a federal bailout of the builders. I would lay big buckets out there around $15 and let them just fill up for the next five years at a 3.5% yield, tons of cash coming from the flood of sales to hit the market because the larger the loss now, the more of their previously paid income taxes these companies will get back!

Talk about moral hazard! Talk about buying opportunity right now.

Where’s that vulture hat? Oh, it’s on my head.