Head Down

"Don’t try to catch falling knives."

That’s what my first boss used to tell me all the time. He had an old war helmet he used to throw on when the market was getting hit hard. He'd bark orders into an imaginary bullhorn he made with a rolled up piece of paper. Sometimes he'd bounce in his chair as if we were being shelled by artillery.

I remember the last time we had a financial system driven recession. It was after the junk bond fiasco, after the savings and loan crisis, post Gulf War I. Real estate prices in the city came crashing down in the aftermath of all the bank turmoil. I moved into a 1 bedroom apartment on a high floor overlooking Madison Square Park that had been for sale on the market for 8 months with nary a bid. He was offering the apartment for rent with an option to buy at $1450 a month. The real estate broker said he could get him down – I got the place for $1200 a month. Real estate prices stayed soft for a long time. A couple of years ago I saw another 1 bedroom apartment in the same building for $4500 a month.

I spent a lot of time looking at the housing stocks when they were frothy. I was hearing bubble talk. Real estate prices always rise over time. Markets were fantastic. Toll Brothers said they were sold out for 3 years on new construction. The last time I’d heard language like that it was the fiber market at Corning in late 2000 – sold out for 6 quarters, they said. The NASDAQ had peaked 6 months earlier and the internet and internet infrastructure stocks had already declined 25-40%, but bandwidth was inevitable and they saw no economic slowdown. Two years later the stock had gone from $200 to $1 and visibility at the company had gone from growth without end to a real good chance of bankruptcy.

When I was listening to the housing calls, I was horrified that 65% of their current sales were being done on adjustable rate mortgages. Rates were at a 50 year low and people were trying to milk another half a point out of the system. It seemed incredibly risky. Apparently it was.

I will tell you that the real estate market hasn’t bottomed until the companies in the business think it might never do so. I still hear an awful lot of recovery talk. I also hear New York is completely resistant to an adverse market.

The fed cut rates by 75 bps this morning and the world is going to hell in a hand-basket. I’m glad I’m on the sidelines today. I wouldn’t know what to do.

That old boss had another quip he’d rattle off from time to time.

“Confucius say, ‘man who try to pick bottom get smelly fingers.’”

Good luck today.