Value Guru’s Square Off

The long run of outperformance in value-oriented investing strategies has left that side of the style box a bit bloated these days. Much like growth managers circa '99, ego's need to be brought down a peg or two. But will it happen from within the stylebox?

Not all value folks are on the same page, and Whitney Tilson is taking down Bill Miller, who was talking his book earlier this month as he tried to build a constructive case for the homebuilders and his portfolio. Value manager vs Value manager, mano a mano:

"What took us into this malaise will be what takes us out," Bill Miller, portfolio manager for the Legg Mason Value Trust, wrote this week in a letter to the fund's shareholders. "Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year."

Miller, whose fund lagged behind the S&P 500 by some 20 percentage points over the past two years after a 15-year run of beating the index, sees a possible replay of the early 1990s recession. Back then, a brief, mild contraction followed a housing boom and a banking industry crisis - the failure of the savings and loans. Many stocks tied to the financial sector fell to deeply depressed levels in that episode, and investors who bought those stocks near their lows raked in huge gains when the economy recovered.

Housing stocks "were among the best performing groups in 1991," Miller wrote, "and could repeat that this year." Seeking Alpha

But Tilson having none of it, and is on the other side of this trade.

Bill Miller may be right with his 1991 analogy—but our money is on the 2001 analogy instead (we’ve recently shorted the ITB—the iShares Dow Jones US Home Construction ETF). That year, the previous biggest bubble in history (tech/internet) was in the midst of bursting and the Nasdaq had fallen from 5,028 to half that. Many investors were piling in, thinking that after a 50% decline, tech stocks had bottomed—but they hadn’t, falling an additional 50+%.

Enormous bubbles don’t burst cleanly, with prices returning to trend line. A study by GMO showed that in every bubble in history, going back to tulib bulbs, the bottom was reached far below trend line.

Given that home prices are still way above trend line and that, we’re only seeing the tip of the foreclosure tidal wave today. It’s hard to see how we’re near a bottom in terms of the fundamentals or the stocks (barring a huge government bailout).

Every dog has his day, and perhaps Miller’s thesis will eventually be proven correct. But I would have to take Tilson’s side of the fight, a nasty short covering rally has stalled for now, and the group is bouncing around in some sort of valuation purgatory.

We checked in with Wayne Nef last week to see if he had budged from his “short the rally” call he made at the end of January. He has not budged. In late January he opined:

January 29th
I would short into the strength given that I don’t see a quick fix for the housing market and so far, I have seen none of the builders aggressively buying land. In fact, the last few headlines I have seen show that the builders have been selling land.

Too, we are waiting for insiders to start buying the stocks. Following their lead in 2005 would have taken you out of harms way. And high profile builder Robert Toll has not waded back in to put any money to work yet. But that apparently does not worry Miller.

We are nearly two months into 2008, but it is more of the same this year for Miller as he trails 98% of his peers heading into the homestretch of February.

Tilson has certainly had a hotter hand than Miller of late, although tht ain’t saying much given how bad Miller’s numbers are. This tape is so dysfunctional even the clubby world of value investing is at odds, and Miller’s unique definition of value continues to be badly out-of-sync with the market.

Three monthChart/ITB Homebuilder ETF

Shorting the Homebuilders as Their Stocks Surge
Seeking Alpha

Long or Short: Homebuilders
1440 Wall Street

Barron’s breaks down today’s numbers with Robert Shiller.

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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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