Paper Economy: Bull Trap?

Friday, March 30, 2007

Bull Trap?

Yikes! I don’t know how this one made its way under the radar but I certainly didn’t see the story when it first crossed.

Last December, in the wake of the Greenspan’s “Worst of this may well be over” outlook for housing, a second significant and widely publicized Bullish note was struck when it was announced that the Bill and Melinda Gates Foundation had made a substantial investment in the homebuilders.

At the time, I looked at the SEC filing (13F-HR) for these transactions and found that they were, in fact, taking a substantial position across the board buying whopping numbers of shares of Beazer, Centex, KB Home, Lennar, Pulte and Ryland totaling over $225,400,000.

Business media accounts at the time attributed this to sound, long term investing on the part of the massive trust, further suggesting that home builders had bottomed out in August 2006 permitting investors who take a long term approach an opportunity to scoop these stocks up at relative bargain prices.

Now, of course, we know that homebuilders are likely facing a substantially more problematic environment than any had anticipated last fall.

Experiencing historic declines to profits, massive impairment charges, momentous inventory backlog, the effects of the sub-prime credit crunch, and now even charges of fraud and accounting irregularities, the sector seems almost certainly poised for a new and substantially harsher leg down.

Without a doubt, many “investors” followed the Gates Foundation’s lead pumping plenty of cash into homebuilder stocks and those that continued to follow their lead probably made out pretty well.

Why?

Because the Gates Foundation apparently sold ALL their homebuilder holdings sometime in December 2006!

That was according to their latest 13F-HR filing dated February 14 outlining their holdings as of December 31 2006.

So was this a “Bull Trap”?

Not for the Gates Foundation as my estimates have them gaining roughly 12.5% or $28,200,000 on the transactions.

Not bad, but what of the numerous “investors” who likely had been influenced by the disclosure and subsequent Bullish media coverage of the trusts initial investment?

Well, we’ll never know for sure, but it’s safe to say that there was substantially less fanfare for the sale than there was for the purchase, most likely leaving many Bullish “investors” now rethinking the soundness of this long term strategy.