Miller also cites Freddie Mac ( FRE) as a temporary victim of the crisis, noting that the mortgage finance company took huge mark-to-market losses when the credit markets dried up over the summer, forcing it to write down the value of some of its assets. These assets are now valued so cheaply that Miller believes Freddie could get a boost when credit markets return to normal. "In a year or so, Freddie will work all that stuff back again" higher, he says, once buyers return to the market.
Building Up Homebuilders
"I'm pretty confident about adding the homebuilders," Miller says, because he sees housing as central to the U.S. social structure in that most people want to own houses. And unlike an area such as structured credit, where it's tough to determine what the size of the market should be, people have some idea of the size of the housing market. He believes the markets have become extremely emotional, citing homebuilder Standard Pacific's ( SPR) sale of bonds on Oct. 31 -- after the credit crunch -- at par, and the fact that those bonds were trading last week at 38 cents on the dollar. He notes that Pulte Homes ( PHM) and others are "all generating a ton of cash." Also, "they're finally going to an asset-light strategy," he says, citing Lennar's ( LEN) sale of land to a venture it created with a Morgan Stanley ( MS) unit. Pulte accounted for 0.76% of Value Trust's holdings as of Sept. 30.
The Next Market Leadership
The leadership in the market is going to shift, Miller predicts, saying he is betting on the places where there's fear in the market. He explains that financial and consumer stocks have taken a beating, and stocks such as J.C. Penney ( JCP) and Sears Holdings ( SHLD) seem cheap. Sears accounted for 3.18% of Value Trust's holdings as of Sept. 30. "U.S. megacap in the best risk/reward trade-off in the market, with the dollar cheaper," he says.