Friday, April 09, 2010

Tripled My Short

While I'm not betting against the long-term fundamentals of the U.S. economy, I tripled my bet against the market today for the following reasons (in no particular order):

1. The P/E10 Ratio (a 10-year avg. of the S&P 500's earnings divided by the current price) is in pricey territory:

2. It's a hedge against the long positions already established (25% net invested mostly Berkshire, American Physicians, Fairfax)

3. Commercial real estate is an easy catalyst leading to bank mark downs, and further credit reductions).

"Between 2010 and 2014 about $1.4 trillion in commercial real estate loans will reach the end of their terms. Nearly half are at present "under water"- that is the borrower owes more than the underlying property is currently worth. Commercial property values have fallen more than 40 percent since the beginning of 2007. Increased vacancy rates which now range from 8 percent for multifamily housing to 18 percent for office buildings, and falling rents, which have declined by 40 percent for office space and 33 percent for retail space, have exerted a powerful downward pressure on the value of commercial properties."

4. The fed recently stopped buying mortgage backed securities. This has provided a steady demand, which has kept yields artificially low.

5. PIIGS (Portgual, Italy, Ireland, Greece and Spain) Headline Risk - Paul Krugman's excellent article here.

6. Several investors I read are even more pessimistic.

Bill Gross

John Hussman

David Rosenberg (but he's been way to early, starting May 2009 - then again so was I).

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