The Thomas K. Brown Affair

A few days ago I blogged about Thomas Brown's (not to be confused with Thomas Crown/Pierce Brosnan) Second Curve hedge funds. The funds placed big bets on a few of the subprime lenders and watched those positions deteriorate substantially over the past few weeks. Many of us in the blogosphere have been watching and waiting to see if Tom, who is an active blogger, would bring us up to speed on his current thinking. Well, he has obliged. Feel free to check out his post here. If you don't feel like reading the blog I can summarize it for you here: Tom is as bullish as ever.

Now I must admit that Tom's continued bullishness is admirable, however I do not agree with his thinking. Subprime lending is all well and good in a roaring bull market. However, on the eve of what looks to be a multi-year declining real estate market I think Tom might be a bit too early to the "Subprime Makes a Comeback" Party. From where I sit there is a perfect storm for the real estate market; home prices are falling, millions of families with adjustable mortgages face recast over the next 24 months, lending is tightening up considerably, there is a glut of inventory on the market, and a housing slowdown could slow the economy considerably (further imperiling the subprime borrower). Remember, real estate cycles are slow and painful. Subprime lending will come back, but it won't be overnight and it won't look like it does today.

Don't get me wrong, Tom makes some good points. He insists that "the stocks of the companies that survive will move up well ahead of any actual bullish news." Undoubtedly a handful of these companies will survive and recover. However, even if Tom does successfully pick the lenders that do survive I don't think the money that he will make back in subprime lending over the next 2-3 years will justify the loss he has surely taken over the last few months.

One of my favorite investing quotes comes from Peter Lynch. He said, "In this business if you're good you are right 6 times out of ten. You're never going to be right nine times out of ten." I don't wish any ill will upon Tom Brown but I hope it is his strong belief in a pending recovery and not his ego that has him holding on to companies like New Century Financial.