Housing Crisis

From today’s FT:

“Flow of funds data put the value of household real estate at the end of 2007 at $20,155bn. Roughly calculated, the Case-Shiller index’s 5 per cent drop since then equates to $1,000bn wiped out in the space of two months – almost 10 times the size of the federal tax rebate. Much of that will be saved rather than spent.”

I’d like to have some conviction on what this information means for global equity markets over the next year. It seems obvious that there will be a steep decline in consumer spending… but the question is will this recessionary impact be offset by recent history-making monetary and fiscal stimulus.

Lex article from FT on the housing crisis:

http://www.ft.com/cms/s/2/38130794-15f2-11dd-880a-0000779fd2ac.html

The Outlay

The Current Market Environment

Overall company valuations appear to be relatively cheap, but I still believe market levels will contract before a sustainable rise. According to Goldman Sachs, we are still 15% above historical trough recessionary P/E levels. Furthermore, variable rate mortgage resets in the US only peaked in March so I think we are in for at least one more quarter of bank earnings surprises, write-downs and increased volatility.

In terms of timing, the S&P 500 is up over 7% for the past month and I think it will have to give some of those gains back in the near term. We should begin by investing between 60-70% of capital at these levels so we can take advantage of any market regressions.

I’ve added some plays that I think are timely:

10% in BCE (BCE). The only risk left in the deal is financing and TD and Teachers are both expressing confidence that it will go through. We are looking at ~15% arbitrage upside at these levels. Even if the deal doesn’t go through, we are protected by a P/E of 7x and cash yield of 4%

7% in Dollar Financial (DLLR). This company owns Money Mart in Canada and has growing operations in the US and UK . It is trading at 9.7X 2008 earnings, its the low-cost industry provider, has high-margin fee-based business, competition is waning due to increased gov’t regulation, and they only have 5% of UK market but investing to grow there. Conservative estimates indicate 32% operating growth overall.

1% in Ultrashort 200% Oil & Gas ETF (DUG). We can buy this ETF to short oil without taking on leverage. I think we can make the bet based on $112/barrel being unsustainable — it is up 80% over the past year with consensus estimates pricing it somewhere between $75-$85.

5% in Nokia (NOK). Stock is down on a profit-warning by #4 player Ericsson. However, Nokia is #1 player in global handset market with a strong focus on emerging market growth — i.e. Eastern Europe, Africa, Developing Asia — and a renewed focus on the U.S. Risks to the business include Blackberry competition, but Nokia is a proven technology leader and trades at 11.4x earnings compared to 53x earnings for RIM.