Value Investing

Marc Cohodes: Canadian housing bubble like US One on “steroids and LSD”

This new interview with famed short-seller Marc Cohodes – has been published on the website of Finanz und Wirtschaft, Switzerland’s leading business newspaper. Below are excerpts (re-posted with permission) – The full interview between Finanz und Wirtschaft editor Christoph Gisiger and Marc Cohodes can be found here -> http://www.fuw.ch/article/the-business-of-central-banks-is-like-pornography/

Also see Home Capital Group

Valeant, Concordia

Short Equitable Group, Canadian housing and Home Capital Group

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Then why are short-sellers not more popular on Wall Street?
In the United States you have freedom of speech as long as you’re bullish and you don’t say negative things about much. People may not like me and some people may actually hate me. But they don’t really know me because I’m a lovable guy. It’s not like I’m calling someone’s wife ugly. I’m a believer in free markets, and that means you should allow buyers and sellers. You need price discovery and you need action and reaction to make markets work. People like me provide information in the market and that’s needed to warn investors of impending problems. So regulators should welcome short-sellers because we bring financial crimes and wrongdoings to their attention. We keep markets honest because we expose hoaxers and frauds for what they are. That’s why the role of short-sellers in the market is vital, especially for individual investors.

What does it take to be a good short-seller?
It’s not for everyone because it’s very volatile. The highs are really high the lows are really low. So to me it’s a trait you’re either born with or not. It’s like having a skeptical or deductive gene. You don’t go to Stanford, Harvard or Yale and they teach you how to be a short-seller. It’s a lot easier to make money by just going with the flow because stocks have a bias to go up. As a short-seller, you have the money against you and have the rules against you. Everyone’s trying to put an ax into your forehead. Also, having some good lawyers is essential. To me, you’re not anything as a short-seller unless you’ve been sued a couple of times. I pay lawyers about as much per year as promoters pay publicists.

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For years stocks basically just have gone up. How does that impact your profession?
Over time, the short-selling community has been decimated. Good short-sellers have become an endangered species. The amount of dollars in the world that is dedicated to buy stocks and to bet that they go up probably swamps the amount of dollars that is dedicated to shorting stocks by 15 million to 1. In the United States which is the largest market there is only about $5 billion of dedicated short money and probably about 80% of that money is divided between only three firms.

This bull market is now going on for more than eight years and valuations seem quite rich. Is this a good time to put on some short-bets?
I really don’t care so much about the stock market in general because I assume that stocks are going up every single day. That’s why I have to assume that I’m absolutely getting no help from the market. So I focus on the crappiest companies I can find: companies that are so poorly run and led by such hoaxers that if they go out of business tomorrow nobody will miss them. That’s where I take my chances.

Historically, at the end of every bull market fraud is being exposed. During the dotcom bubble you had infrastructure companies like Enron and Worldcom and during the housing boom you had subprime mortgage lenders like Countrywide Financial. What’s it going to be this time?
It’s a fascinating time. People don’t seem to be concerned about much, I hope everybody is happy. I don’t exactly know what will happen when the next bubble bursts. But it’s going to be around leverage and it’s going to have to do with private equity and with all these companies that have been drunk on stock buybacks. They are bound to the community of activist investors who coax companies into leveraging up and buying back their worthless stock. That’s going to come back and haunt people. But it’s kind of what I said before: I go more name by name and I am very focused on my day to day business.

A poster child of the buyback frenzy is IBM (IBM 153.2 1.12%). Is this a good stock to short?
This whole stock buyback and financial engineering concept just hasn’t worked for IBM. They just wasted a lot of shareholder money. But I’m not short IBM and I’ve never been short IBM. It’s one of those companies that would really be missed when they go out of business. That’s why I don’t play with most stocks in the Dow Jones (Dow Jones 20976.8 -0.02%) and I don’t really play with most stocks in the S&P 500 (SP500 2400.08 -0.09%). I like these crappy, poorly run outfits that usually never get big enough to get into the S&P 500.

How do you find such companies?
That’s sort of the secret sauce. One of my principles is to bet the jockey, not the horse. That means I try to bet against people who are incompetent and have a bad track record. They say things that don’t check out, employee turnover is high and former employees and customers tell very troublesome stories. That doesn’t necessarily mean it’s a great short. But when you see things like that it’s a good place to dig.

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What’s going wrong in Canada?
The Canadian housing market is essentially the US housing market during the second half of the last decade but on steroids and LSD. People are leveraged to a scope I’ve never seen. In Toronto and Vancouver, which are the most moneymaking areas, the average income of a family is only about  80,000 to 100,000 Canadian dollars. But house prices are 8 to 10 times that. People live way beyond their means and in order to keep up they are borrowing more and more and more. The problem is that the people who are lending you money expect to be paid back. So when things change they are going to change drastically and people are not going to know what hit them. It’s going to be horrific.

How did this bubble grow so gigantic?
The Canadian housing market is a money laundering-induced market. They have sought Chinese money to keep the housing market propped up. But it won’t last. Especially Vancouver is a place for the criminal element to come into Canada and hide money. You walk around places at busy hours and there’s no one there. People own on multiple units and they’re just taking money from totalitarian areas and putting it into real estate, pushing up prices and crowding out people who really need to live there. The same is true for Toronto. It’s the financial capital of a banana republic. That’s what’s going on in Canada and they really need to start paying attention. They admit that they have a housing bubble and that they need to be doing something about it. But all they do is talk.

How do you short the Canadian housing market?
I think the five big Canadian banks are okay. But everything around the periphery is going to collapse. The regulators have been sleeping at the switch. To me, the struggling mortgage lender Home Capital Group is like the vulture in the Canadian housing coal mine.  It’s Ground Zero for everything that’s wrong: you have mortgage origination fraud and you have laundered money. I have been talking about it in the media for two and a half years and I have exposed them for what they are. But regrettably, everybody is of the point of view to shoot the messenger and not listen to the message. What started off as a company which was telling stories and missing numbers in a booming housing market turned into mortgage origination fraud, then turned into disclosure fraud and will probably turn into insider trading. It will turn out that the numbers really aren’t the numbers.

And what about Equitable, Canada’s other large home lender?
Equitable is as sick as Home Capital. Now, the government seems to help out to try to stabilize the company. But that won’t work. It’s only going to delay the end result. They’re trying to say Equitable is fine and not Home Capital. But in a lot of ways Equitable has the same problems as Home Capital and they have their own specific issues. So I feel good about the work I’ve done. I feel really good about exposing this fraud and I think I will save Canada billions and billions of mortgage fraud when this thing is all set and done.

Full interview can be found here