This market will drive a sane person batty at times, I have to tell you. Remember about 2-3 months ago, every day oil dropped people ran into technology stocks as a “safe haven”? We were shaking our head sadly and saying, how is this a safe haven… in time this will be proven to be a false assertion. But that did not stop the stocks from running up 5-10-15% each time oil dropped a few bucks as hedge funds had to find something to “play”. Remember, as we always say, perception is reality. Until reality strikes. Lately we’ve seen poor earnings from Dell (DELL), we’ve seen bad news out of the semiconductor industry yesterday, Corning (GLW) is struggling, we’ve seen Qualcomm (QCOM) saying Americans & others in developed economies are not updating phones as often as they used to. Folks, you know the economic malaise is serious when Americans are not updating their phones and TVs- I mean we’d rather cut food out of our lives than not upgrade to the newest electronic gadgetry. If you ever want anecdotal evidence of a weak economy…

• Qualcomm Inc (QCOM) is seeing some signs that customers are becoming slower to upgrade their cell phones, Chief Executive Paul Jacobs said in an interview with cable television network CNBC on Wednesday.
• Jefferies & Co analyst Bill Choi said the comment, which he believes could also be applied to the United States, fueled worries among investors who are already anxious to know whether phone demand would meet the typically high expectations for the upcoming holiday shopping period.

Why do I bring that up in a post about housing stocks? Because if a thesis has enough money behind it, it does NOT matter if its proven to be untrue -at least for a good amount of time. This is what drives someone who uses common sense up the wall at times. By the time the evidence comes to fruition that said thesis is simply silly, the hot money has moved on and onto the next “thesis” they want to advance. So they were wrong about technology as a save haven 60-90 days ago? Doesn’t matter - still drove the stocks up for no good reason and made their money. Perception is reality.

So now the hot theories are as oil prices and commodities in general fall it will solve most (if not all) of the ills of the US consumer. I find it a myth. But does it matter? No. Because retail stocks are being driven up big time on this thesis. And if in 4 months we see this was all a big fairy tale? Doesn’t matter. As long as enough money is behind the theme it does not matter if its correct or not. This is the lesson about sentiment. I fully expect the recent rallies in housing, retail and the like to be proven premature when we see evidence to the contrary this fall and winter. But that won’t stop glib pundits from telling us “the stock prices are clearly showing us the future is rosy”. Note - those same pundits pointed to technology stock prices pointing to “technology is immune” to slowdown 90 days ago.

I still haven’t gotten to why I bring this up in a housing post. Part and parcel with the “as oil falls the US economy will bounce back; driven in large part by the booming consumer who now has $15 more a week in his pocket” is the “you need to invest in US stocks because as the rest of the world devolves into chaos you don’t want to own stocks in countries falling from 9% growth to 6%, instead invest locally”. Is this correct? I think not. But it does not MATTER - enough money is now chasing that trend to make it “work”. For now at least. Until its disproved.

Case in point - let’s look at 2 homebuilders - one in the United States of Subprime and one in that nation that is devolving into chaos as the US rebounds, Brazil. I can pick any homebuilder because in this market it doesn’t matter what stock you buy as long as you are in the right sector - so I picked Pulte Homes (PHM) for kicks. We are now told, in anticipation of a rebound from the biggest housing bubble ever, we’ll recover in just under 3 years and you want to buy a year ahead of time… so buy now. As I look at the year ahead for Pulte (using analysts estimates) I see a company that will grow in the next year… err, did I say grow… I meant SHRINK from $6.2B to $5.0B in revenue, or 20% (and this is one of the better run housing companies) and reduce its loss from $4 to just under break even. See the cool thing about not having any earnings is you can never be expensive on P/E ratio This is a “great” story in this market - as evidenced by the chart.

So we are told to run into these stocks, and abandon stocks in foreign countries who will now slow, as discussed above… let’s use the Brazilian homebuilder Gafisa (GFA), which is set (again using analysts estimates) from just over $1 Billion to nearly $1.5 Billion (mid 40% growth), and grow earnings from $2.58 to $4.11. But we are told that is all fairy tales and as commodities fall, the economy (Brazil) that is reliant on commodities will devolve into anarchy - so instead of 45% growth, maybe (gasp) they do 30% growth… or (gasp) 25%. So we don’t want junk like Gafisa trading at just over 10x this years earnings and instead need to buy US homebuilders. Here is the chart to prove to you that you should be avoiding Gafisa aka not a great US homebuilder.

Folks, that is the current “logic” in this market and why buying anything based on fundamentals is completely useless right now. But it’s about timeline. Because for those of us with 5-10 year time lines (certainly not hedge funds whose time line is 90 days or less) we will be looking for opportunities like Gafisa - guess who is in there with us? Sam Zell. I don’t see him buying DR Horton (DHI) or a US homebuilder - companies in a mature market. But Sam Zell is not trying to spit, flip, and kick his way to gains every 90 days so he can make his performance fees for his hedge fund. Now as for myself, I’m sort of in the middle - I have to ignore fundamentals to some degree because I can’t sit in Gafisa with a large stake and lose 30% in a few months - because investors are a bottom line type and frankly most look at performance first and foremost (and last) and won’t care that your buying stocks for cheap if you are not outperforming in every time slot. When I was trouncing the market by 20%+ I was getting pledges by the bucket. Now when I lag for a few months, it begins to lag. So this is the harsh reality and it is what it is. So for now I need to own Lennar (LEN) and cackle about how cool it is I’m making money on a money losing operation in a country whose housing market is not coming back anytime soon. Because.. Perception is Reality.

But I wanted to point out Gafisa because one of our young readers - his blog here - pointed me to some information which I want to reference. Because we’ll be in Gafisa for years - even though now we cannot own much of it because I need to actually show performance instead of losing money hand over fist fighting hedge funds. One day, when investing horizons last more than 72 hours this stock will rise from the ashes.

Sam Zell is looking to invest even more in countries that are about to evolve into anarchy (as the US concurrently enters a period of bliss)

• Billionaire real estate mogul Sam Zell, who built a fortune investing in distressed property, sees opportunity in the beaten-down shares of Brazilian home builders and plans further investments in Brazil.
• Zell’s international private equity arm, Equity International, is betting that a consolidation of Brazil’s overcrowded publicly traded real estate sector will unfold by mid-2009 or early 2010.
• Realty was a major focus of Brazil’s recent boom in public stock offerings, but too many companies entered the sector, Gary Garrabrant, Equity International’s chief executive and co-founder, said in an interview. Many have since seen their shares plunge and investors are demanding better performance.
• Equity International, through its stake in Brazilian home-builder Gafisa (GFA, hopes to pick up land when the shake-out squeezes management that cannot deliver.
• “We’re watching three or four of those through Gafisa. Because we believe over the next, call it 12 to 18 months, there will be a consolidation phase that begins,” said Garrabrant, who also is chairman of the board at Gafisa.
• “We’ve actually received calls, it’s fascinating, from two or three founder CEOs, who are — I don’t want to say waving the white flag — but are pulling the white flag out of their pocket,” he said. “I don’t know how long it will take for them; I don’t know how big the flag is.” Many of the founders behind the new public realty companies, while highly entrepreneurial, were ill-prepared to deal with the level of disclosure investors demand, he said.
• Zell, known as the grave dancer because of an article he wrote 30 years ago about picking through the bones of distressed properties, is big on Brazil, so much so, Garrabrant said, that both had broken pledges to not promote the country.
• Brazil is a beacon for realty investors because of pent-up demand among a population of 185 million and a housing shortage of 7 million to 8 million.

And lo and behold within weeks… Bloomberg: Gafisa Buys a Competitor

• Gafisa SA, Brazil’s second-largest real estate developer, agreed to buy a controlling stake in rival Construtora Tenda SA, aiming to boost its presence in the low- income housing market. The companies’ shares surged. As part of the transaction, Gafisa will have a 60 percent stake in Tenda, while Fit Residencial Empreendimentos Imobiliarios Ltda., the Gafisa subsidiary focused on low-income housing, will be part of Tenda
• “This transaction can be good for both companies,” said Leonardo Cavarge, analyst with Link Corretora. “Tenda has always been dedicated to low income so it will have synergies with Fit. There will be an exchange in knowledge that will be positive for the companies.”

So once again, HAL9000 the quant hedge fund computer says “buy the country’s housing stocks who have 11 months worth of inventories and foreclosures in waves, on the promise that things will be better in 6-9 months“ instead of “buy the country’s housing stocks where there is a shortage of 7-8 million units - because as commodities go, so will go Brazil“. That is as simple as the algorithm is. When oil is down, Brazil must be sold - every stock in the country.

Sam Zell thankfully is not a computer. For those among us whose timeline is longer than 1 quarter and do not have to “perform” to continue acquiring assets or keep those under their roof there are great opportunities for those with patience. For the rest of us catering to a flighty investor base who performance chases, well we need to make numbers every quarter I guess… and leave the big wins for Zell

Long Gafisa, Lennar in fund; no personal position

Last 5 posts by Trader Mark

• Boston Globe: What Would a 2009 Depression Look Like? - November 19th, 2008
• Perfectly Hedged - November 12th, 2008
• Earnings for Perfect World (PWRD) and Energy Conversion Devices (ENER) Both Solid - November 10th, 2008
• Sequenom (SQNM) "Misses" But We Really Don't Care - October 30th, 2008
• Thoratec (THOR) Smashes Earnings; Somehow Guides Up - October 30th, 2008