made my bed, page-8

MM, With the majority of ASX-listed stocks being characterised by either flawed business models, incompetent management, under-funded balance sheets (or a combination of these, invariably) - which would provide ample shorting opportunities on company-specific fundamental reasons - I can't understand why one would short a broad sector based on the probability of some tail risk event... in this case a call on a collapse in the housing market.

It's a bit like shorting IAG because the east coast of Australia hasn't had a big hailstorm for a few years, or shorting WOW because you're worried that their truck drivers might go on strike, or shorting TLS because someone might one day discover a way to communicate telepathically.

Sounds to me like a case of 60% HOPE, 30% EMOTION and 10% GUT FEEL.

I have no idea how to predict housing cycles, but I hear and read all manner of economists and building material analysts saying that the housing sector is not only starting to recover, but the residential construction sector is THE sector the RBA is targeting as a growth cylinder in coming years to replace the slack left by the resources sector. Not just that, but it looks like consumer sentiment is due to improve given the rise in some consumer confidence leading indicators, to a level above zero in July and August, for the first time since November 2010 (source: Westpac Consumer Confidence Leading Indicator Survey).

But if you do have strong views on the housing sector – I’m not sure how one really can – why are you thinking of covering your short positions around the dividend date? Surely your investment thesis isn’t predicated on an element of such precision that says you expected to see a collapse in the housing market between now and the ex-dividend date?

And if you look at the results of the two major banks that reported recently, in both cases their Australian businesses were travelling to expectations (for NAB the Australian business is travelling better than expectations, but it was the UK business that caused the headline result to fall shy of consensus thinking). And that’s despite a very tough manufacturing and retail environments over the past 12 months.

And remember that these are basically the world’s only Double-A rated commercial banks. I met up with a sales trader from one of the major investment banks last week, and when I asked him what he was seeing in the bank space, he said that for the past 6 months his desk gets daily program trades from offshore investors – especially Asian funds - to buy major banks stocks. He tells me their view is that with the A$ now morphing into a de facto reserve currency (well, for the time being, anyway) and combined with investors chasing yield globally, Australian banks stocks remain the perfect home for excess liquidity being created by the acutely easy monetary conditions around the world today.

As if I find shorting of major banks on the basis of anticipating some event of indeterminate probability to be a strange concept, then shorting WRT seems even more bizarre.

Betting against those smart Lowy folk is a gutsy call, to say the least.

Did you have a close look at that deal they did with AMP?
Or WRT’s latest trading update released last week?
99.5% store occupancy when the Australian retail sector is in its worst funk in living memory.
That speaks volumes for the kind of high-quality business.

And yet you’re short it.

If you insist on shorting stuff, why not target some over-geared television company like SWM or TEN, or some structurally flawed newspaper business like FXJ, or a highly fixed cost engineering construction company that services the resources sector.

But shorting some of the most durable, high-quality franchises with market monopoly positions is beyond my limited understanding.

Disclaimer: I own ANZ, not because I think it is any better an investment than the other major banks; I actually can’t tell them apart.