Dialectic Capital, like other short biased hedge funds has been taking heat from the booming equity markets. The hedge fund notes in a recent letter obtained by ValueWalk that most shorted stocks have performed unreasonably well in the past months, defying fundamentals. Dialectic thinks that this outperformance is a predictor of a market correction, as similar corrections have occurred on three previous occasions according to Morgan Stanley’s analysis. Dialectic Antithesis Offshore is down 4.82 percent in Q1.
China And The Housing Bubble
Despite China’s continuing efforts to hammer down housing prices, they keep rising. Dialectic comments on this sad state of affairs ailing Chinese economy from every end. The GDP, PMI data, electricity consumption, commodity prices, all have taken a turn for the worse. The hedge fund calls China the prime indicator of global monetary explosion experiment. Being the forerunner in credit creation, it will also be the first example of how it fails and what the ramifications could be. In Dialectic’s trademark sarcastic style, the author remarks that China’s official reaction to its own slowdown is actually saying that, when you see the economy implode, we meant for that to happen.
Dialectic is looking at China’s trust financing and home sales to see what new course the economy takes. Dialectic has shorts in banks, real estate and other China frauds.
Dialectic on Technology
Dialectic is also seeing fundamental weakening in the technology sector. They point out that over 60 percent of software companies missed analyst expectations in Q1 earnings, flagging International Business Machines Corp. (NYSE:IBM) as the a showcase example of bad performance. However Dialectic has not attained similar traction in its technology short positions. The fund sees many software names who are ‘frothy’ and have low quality businesses. The fund also has longs in a few tech names and some network equipment makers which have unsurprisingly done better than Dialectic’s shorts.
The Ever Confusing Case of Brookfield Asset Management
Dialectic again talks about the confusing case of Brookfield Asset Management Inc. (TSE:BAM.A) (NYSE:BAM), which according to the fund has a particular talent for financial wizardry. The company has responded to allegations by short sellers in the past regarding its ‘financial wizardry’. In the current missive, the fund talks about BAM’s spun off unit Brookfield Property Partners LP (NYSE:BPY), which does commercial real estate investing. The miracles of BPY is that it gets to charge a flat management fee of $50 million annually when its fund only owns four stocks, another miracle being that now when Brookfield Asset Management Inc. (TSE:BAM.A) (NYSE:BAM) has sold its 7.5 percent ownership in these 4 stocks, they get to receive greater earnings from BPY than they did when Brookfield Asset Management Inc. (TSE:BAM.A) (NYSE:BAM)owned BPY wholly.
Dialectic also suspects that Brookfield Property Partners LP (NYSE:BPY) has a serious cash shortfall—according to Brookfield’s own statement it has more outstanding distributions to cater to than its inflows can handle. The hedge fund calls BPY a Ponzi scheme, as the IPO was was used to raise money from new investors to pay off old ones. In Dialectic’s words: “We estimate they are $150-250 mm short and the shortfall will have to be made up with future debt or equity offerings. This is part of the essential nature of a Ponzi scheme – raise money from new investors to pay out old investors.”
In the Canadian housing sector, Dialectic sees Home Capital Group Inc (TSE:HCG) and Genworth MI Canada Inc (TSE:MIC) as good choices for short positions.