WCI, the Fed and Spring of 2010
Growth Report


Have You Seen This?

Have You Seen This?


WCI, the Fed and Spring of 2010


Just because your title is “billionaire investor” doesn’t mean you don’t make a mistake from time to time.


Billionaire investor Carl Icahn apparently lost $113 million when his home-building company, WCI Communities declared bankruptcy last Monday. I guess he can afford it. But he should thank what lucky stars he has left that he wasn’t able to increase his 14.5% stake as was reported in mid-July.


I can’t help but take a special delight in Icahn’s mistake this time around. Not that I want to see anyone lose money. But Icahn’s something of a bully when it comes to his investments. I don’t think anyone’s shedding any tears for his loss with WCI.


Besides, it’s pretty well understood that to make money in the stock, someone else has to lose it. And I’m still pretty excited that I was able to turn Icahn’s loss into a gain for some of my readers.


As I may have casually mentioned last week, my stock analysis system, which I affectionately call TRIGR, first targeted WCI Communities as a Top Short way back in the beginning of May. That was the first of many appearances, and the stock was trading for $2.65 a share.


Most recently, on July 29th, WCI appeared on Top Shorts list at $1.31. Just 4 trading days later, WCI dropped to $0.59 on the bankruptcy news. That’s a gain of +55% to +77%, depending on your entry point, as this troubled housing stock finally threw in the towel.


Not that I think the two events are directly related, but WCI announced bankruptcy the day before The Fed thrilled the markets by leaving interest rates unchanged. 


                           What’s A Fed to Do?

Stocks did their best bull market initiation in the wake of that no-decision on interest rates. The possibility of a hike was clearly on investors’ minds. And they were obviously pleased when Bernanke & Co. decided to stand pat.


Even though a rate hike would have been good for the dollar and inflation, it never seemed to me that a hike was a real possibility. So why the relief rally?


I can’t help but think there’s a fair amount of investors out there who think stock prices have bottomed. The casual connection between the Fed and WCI is of the “how can things get worse?” variety.


After, all we’ve seen 6 banks fail in the sub-prime debacle. Inflation has picked up because oil prices are at (until just recently) ridiculous levels.  Housing stocks are decimated and, even worse, our homes which are the average American’s biggest investment, have lost a significant amount of value. Things can’t get much worse, can they?


                                Careful What You Ask For…

I learned a long time ago not to tempt fate with questions like that. Things can always get worse. And I suspect those value investors who are already scooping up bombed out financial stocks and even dipping a toe back in the homebuilder stock pool are going to find that out.


Now, before I continue, I just want to make it clear that I’m not a perma-bear. I don’t think the U.S. economy is doomed. I’m just not one for irrational exuberance. And investors’ recent eagerness to overlook bad news strikes me as bit irrational.


It’s easy to look at valuations and conclude stocks are cheap. And as we all know, they don’t ring a bell when the market bottoms. Bottoms are usually made while the bad news is still flowing. Investors have to be able to sift through the bad news to find the hidden morsels that point to the next bull market.


However, there’s a bit of bad news that shouldn’t be overlooked. And that’s rising unemployment.


                             Unemployment Rising

Three months ago, the Philadelphia Fed forecast unemployment to hit 5.4% for the 3rd quarter, which ends with September. Now, that forecast has been revised upward to 5.7%, with 4th quarter unemployment to hit 5.9%.


What’s more, as the forecast for unemployment rises, GDP expectations are falling. GDP estimates are down to 1.2% from 1.7%.


I remember the recession of 2001 well. Unemployment started falling in the wake of the DotCom crash as corporate America cut IT budgets. It didn’t pick up for 2 full years. And even then, we were treated to a “jobless recovery” for another year.


Ultimately, that recession was measured at just 8 months. It was a “mild” recession. But stocks were down from spring of 2000 to October of 2003.


Even a cursory comparison should give the silver-lining crowd pause. Unemployment has been rising for 8 months. And stock prices peaked 10 months ago. So even if we follow the course of 2001’s mild recession, unemployment may not stop rising until December of 2009. And stocks may not find their final bottom until spring of 2010!


All you have to do is take a look at Japan’s housing market and economy during the 1990s to find the worst-case scenario. Again, I’m not a perma-bear. And the U.S. economy is far more dynamic than Japan of the 1990s. Only an external shock could keep our economy down for 10 years.


                                      Hit and Run


So what’s an investor to do? In my not-so-humble opinion, uncertain times call for uncertain investing. That doesn’t mean you should invest in things you don’t understand or believe in. It simply means you can’t hold any new positions with strong conviction.


If you caught a little bounce in the housing or finance sector, great. Take you 15%-20% gains and move on. It’s probably not an ideal time for long term buy and hold investing.


The readers who follow my stock picking machine TRIGR, made some money in bio-tech a couple weeks ago. (disclosure: We’re still holding a couple choice bio-techs). We’ve already moved on to some home healthcare stocks that have been moving. Between July 23 and August 4, Almost Family (Nasdaq:AFAM) was a top recommendation 5 times. And 5 times, traders took gains of 21%-36%.


I won’t be at all surprised if we’ve left this sector behind in another week or two to pursue other opportunities. And we may be back to shorting troubled homebuilders like WCI Communities if that’s where TRIGR says the money is. We’ll take what the market gives us.


Best Regards,


Ian Wyatt

Chief Investment Strategist

Growth Report

Click here to find out more about how you can profit from the next financial or housing sector “deathbed” stock with TradeMaster Daily Stock Alerts.

Posted 08-13-2008 1:49 PM by Ian Wyatt
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