When i bought the 1 google put i forgot to buy my 1 amazon put at that time. Fortunately today Mr. Market gave me an opportunity to buy 2 at a good price. Looking at the amzn after hours it looks like it will pay off. I have to admit the google put is a gamble. But i'm working with bear market rules which losely state good news is bad, bad news is horrible, and great news is just a lie.
We will see what happens but looking at the market sell-off of the post fed cut rally i believe i have a greater than 50/50 chance of it paying off.
It's looking to me like we had a little rally into the declining moving averages and as such the decline is to continue for now. We will see about tommorows job numbers. Whether they are good or bad my guess is the birth death model will have a heavy effect.
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Wednesday, January 30, 2008
Monday, January 28, 2008
walking away PII
One point i forgot to make in my last posting was that, while the pundits and permabulls were dismissing any concern about a housing bubble, the sources i was paying attention too were highlighting the nature of the bubble and the consequences. Who was right?
Well the issue is there are always permabulls and permabears in any market, housing included. So who do you listen to? Well neither. You should read both sides and decide for yourself. But frankly i pay attention to those who see both sides of the issue. In this case Bruce Norris is the definitive resource about the housing markets, especially in Southern California. While he was recemmending sell, morons like Jim Cramer were pumping the home building stocks. Who knows more about it? Not Cramer.
This also highlighted for me an interesting thing. Cramer was pumping the homebuilder stocks basically out of a lack of understanding of the industry and many of the challenges it faced. One example was that Cramer was stating that builders only build what they sold. Well not true. What about the 40% cancellation rates? And why are they still building even now? The anwser is that they are stuck finishing a project due to commitments, insurance, and a myriad of other reasons pointed out by Norris.
While these minor little details seem unimportant to the big picture, they are. Why? Well the fact that builders must finish what they started means that they are forced to keep building inventory into a declining market which exaserbates the situation. It is a key in understanding when to buy real estate or the homebuilders.
In my case I got married and we ended up selling both our homes. We still have the nut there and we are renting. In this case we did not time the real estate market we just looked at the facts. Should i rent this condo? No it was a losing proposition because rents would not cover the mortgage plus taxes AND i could sell now two years after my wife bought for nearly twice what she paid. Should we buy this house (and moreover rush to submit an offer in 1 hour)? Well no. Because we can rent a better place for half as much money each month.
So in some ways you only need to use your own common sense. Run the numbers yourself and you will see the right thing to do. The numbers will tell you when it makes sense to buy a house. They will reveal that "hey i can buy for the same price i rent and get the tax benfits". That is when you buy (think how far we need to come). To summarize be very careful where you get your information from. It can really hurt you if you are not careful.
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Well the issue is there are always permabulls and permabears in any market, housing included. So who do you listen to? Well neither. You should read both sides and decide for yourself. But frankly i pay attention to those who see both sides of the issue. In this case Bruce Norris is the definitive resource about the housing markets, especially in Southern California. While he was recemmending sell, morons like Jim Cramer were pumping the home building stocks. Who knows more about it? Not Cramer.
This also highlighted for me an interesting thing. Cramer was pumping the homebuilder stocks basically out of a lack of understanding of the industry and many of the challenges it faced. One example was that Cramer was stating that builders only build what they sold. Well not true. What about the 40% cancellation rates? And why are they still building even now? The anwser is that they are stuck finishing a project due to commitments, insurance, and a myriad of other reasons pointed out by Norris.
While these minor little details seem unimportant to the big picture, they are. Why? Well the fact that builders must finish what they started means that they are forced to keep building inventory into a declining market which exaserbates the situation. It is a key in understanding when to buy real estate or the homebuilders.
In my case I got married and we ended up selling both our homes. We still have the nut there and we are renting. In this case we did not time the real estate market we just looked at the facts. Should i rent this condo? No it was a losing proposition because rents would not cover the mortgage plus taxes AND i could sell now two years after my wife bought for nearly twice what she paid. Should we buy this house (and moreover rush to submit an offer in 1 hour)? Well no. Because we can rent a better place for half as much money each month.
So in some ways you only need to use your own common sense. Run the numbers yourself and you will see the right thing to do. The numbers will tell you when it makes sense to buy a house. They will reveal that "hey i can buy for the same price i rent and get the tax benfits". That is when you buy (think how far we need to come). To summarize be very careful where you get your information from. It can really hurt you if you are not careful.
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walking away.
I remember only a few years ago the pundits and otherwise morons talking about how the resets in home mortgages, although a problem for some, would not be a problem in general. They claimed that most people could handle the increased payment and would do whatever it would take to stay in the home. Well 60 minutes just dispelled that myth last night. See this blog here for a good discussion: http://globaleconomicanalysis.blogspot.com/2008/01/60-minutes-legitimizes-walking-away.html
The crux is very simple. Even if you could pay the mortgage why pay it? Why struggle to pay it and sacrifice to hold onto a house which is loosing value? The answer for any rational person is you stop paying. Although it is difficult to determine the exact declines, for most people in this situation a quick back of the envelope calculation would reveal they lose more each month than the pittance that actual goes into equity. This assumes you are actually building equity, which does not apply to those in the interest only stage of their loan.
But some would counter what about your FICO score? Well the people in this situation have already done the analysis and figured the hit they take is worth it. Also they realize that their credit cards or at least some of them won't be canceled so they can still get by. But this brings up a very good point. These people realize a foreclosure will bring a mark on the record that may prevent them from buying a home for the next 7 to 10 years. And the point is they don't care. So they don't care and will not be in the market to buy a home again for 7 to 10 years. So what does this say about the recovery and next real estate market boom? It's a long way off!
I do not believe the 60 minutes story is an isolated incident. In our neighborhood we have the same situation. A family that certainly can pay the mortgage let the NOD get filed. I was not aware of this until recently, but my guess is they stopped paying the day they bought a nice new Cadillac SUV. Mind as well buy the car while it's easy ...
The crux of the matter is that this part of the American Dream is a lie. Ala Kiyasaki (Rich Dad Poor Dad) a house is not an asset but a liability. This episode in our history should teach people that. It's not that we should not aspire to own a nice home or a nice car, but we most aspire to truly afford a nice home or nice car. Only if we can actually afford it do we buy it. What is a good indicator of being able to afford a home? Well how about you can put down 20% and your income meets the 28% front end ratio (Monthly Housing Payments/Gross Monthly Income) and the 36% back end ratio (Total monthly expenses/gross monthly income). Oh is this not fair?
Well how about this. What happens to all these people who did not meet these requirements and bought homes only later to be foreclosed. How many lost ALL their retirement savings trying to save the house? See the next shoe to drop is the devastation this is doing to peoples preparedness to retire. There is only one way to sum this up.
It is really really bad.
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The crux is very simple. Even if you could pay the mortgage why pay it? Why struggle to pay it and sacrifice to hold onto a house which is loosing value? The answer for any rational person is you stop paying. Although it is difficult to determine the exact declines, for most people in this situation a quick back of the envelope calculation would reveal they lose more each month than the pittance that actual goes into equity. This assumes you are actually building equity, which does not apply to those in the interest only stage of their loan.
But some would counter what about your FICO score? Well the people in this situation have already done the analysis and figured the hit they take is worth it. Also they realize that their credit cards or at least some of them won't be canceled so they can still get by. But this brings up a very good point. These people realize a foreclosure will bring a mark on the record that may prevent them from buying a home for the next 7 to 10 years. And the point is they don't care. So they don't care and will not be in the market to buy a home again for 7 to 10 years. So what does this say about the recovery and next real estate market boom? It's a long way off!
I do not believe the 60 minutes story is an isolated incident. In our neighborhood we have the same situation. A family that certainly can pay the mortgage let the NOD get filed. I was not aware of this until recently, but my guess is they stopped paying the day they bought a nice new Cadillac SUV. Mind as well buy the car while it's easy ...
The crux of the matter is that this part of the American Dream is a lie. Ala Kiyasaki (Rich Dad Poor Dad) a house is not an asset but a liability. This episode in our history should teach people that. It's not that we should not aspire to own a nice home or a nice car, but we most aspire to truly afford a nice home or nice car. Only if we can actually afford it do we buy it. What is a good indicator of being able to afford a home? Well how about you can put down 20% and your income meets the 28% front end ratio (Monthly Housing Payments/Gross Monthly Income) and the 36% back end ratio (Total monthly expenses/gross monthly income). Oh is this not fair?
Well how about this. What happens to all these people who did not meet these requirements and bought homes only later to be foreclosed. How many lost ALL their retirement savings trying to save the house? See the next shoe to drop is the devastation this is doing to peoples preparedness to retire. There is only one way to sum this up.
It is really really bad.
--
Friday, January 25, 2008
But what about my dog!
Now I'm reading stories about sending payments to retirees. It's not that i have anything against retirees, as my Dad and all my Aunts and Uncles who all participated in making me who i am, are retirees, but please why not send a check to my dog.
The crux of the matter is this money proposed in the stimulus package is being made up out of thin air. As such it devalues all the other money that was created out of thin air before it. The way to clearly see this is look at the price of gold in dollars and look at the dollar index. What you see is the consequences of making all this money. The cost of it is the rise in prices.
So will these checks make up for the steady rise in prices due to the declining dollar and the rise in commodities, which all are linked to the rapid creation of money? The answer is most likely not. If you have paid an extra $50 a month for gas and an extra $50 to heat your home and an extra $20 a month in food price over the last two years what did that cost you? 120 x 24 = $2880. So if you get $1800 back, assuming a couple, you are still in bad shape. And since the markets have responded to the announced stimulus with more rises in gold and more commodity price increases you can be sure that there is more inflation to come. My guess is the price increases to come more than offset what the average Joe gains from the rebate.
The point is you don't get something for nothing. There is a hidden cost to this stimulus package. You mind as well just admit it is insane and give checks to cats, dogs, and pet reptiles as well. Hey Petco needs to get some of the money too!
I suppose the thing that pisses me off the most about these checks is that the government is just plain asking you to do the wrong thing with it. They want you to spend it. They don't care if you are already in over your head in debt, your job is in trouble, or you are facing serious illness, they just want you to spend, spend, spend. I think it is pathetic that if you teach your children to take the governments advice they are doomed to bankruptcy ... well if they can still actually file for it. Disgraceful!
I will add the check to my rainy day fund which looks like I will need before too long with the clowns running the show right now.
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The crux of the matter is this money proposed in the stimulus package is being made up out of thin air. As such it devalues all the other money that was created out of thin air before it. The way to clearly see this is look at the price of gold in dollars and look at the dollar index. What you see is the consequences of making all this money. The cost of it is the rise in prices.
So will these checks make up for the steady rise in prices due to the declining dollar and the rise in commodities, which all are linked to the rapid creation of money? The answer is most likely not. If you have paid an extra $50 a month for gas and an extra $50 to heat your home and an extra $20 a month in food price over the last two years what did that cost you? 120 x 24 = $2880. So if you get $1800 back, assuming a couple, you are still in bad shape. And since the markets have responded to the announced stimulus with more rises in gold and more commodity price increases you can be sure that there is more inflation to come. My guess is the price increases to come more than offset what the average Joe gains from the rebate.
The point is you don't get something for nothing. There is a hidden cost to this stimulus package. You mind as well just admit it is insane and give checks to cats, dogs, and pet reptiles as well. Hey Petco needs to get some of the money too!
I suppose the thing that pisses me off the most about these checks is that the government is just plain asking you to do the wrong thing with it. They want you to spend it. They don't care if you are already in over your head in debt, your job is in trouble, or you are facing serious illness, they just want you to spend, spend, spend. I think it is pathetic that if you teach your children to take the governments advice they are doomed to bankruptcy ... well if they can still actually file for it. Disgraceful!
I will add the check to my rainy day fund which looks like I will need before too long with the clowns running the show right now.
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The qqqq's apple problem ...
I'm not an expert on how the NASDAQ 100 index is calculated but the other day i looked at the "holdings" and was shocked to see the percentage of the index made up of apple. Checking here
http://www.powershares.com/products/overview.aspx?ticker=qqqq
we see that apple by far dominates the index by making up 10.74% of it currently (note this changes daily). We currently have the case where the qqqq is a slave to apple. When apple does good so do the Qs, but when it doesn't the Qs will have trouble overcoming the pressure applied by aapl.
Other NASDAQ-100 holdings
Apple Inc. 10.74%
Microsoft Corp. 6.95%
Google Inc. (Cl A) 5.34%
QUALCOMM Inc. 5.17%
From the NASDAQ website i see that they review the holdings quarterly, but given their criteria for doing a re balancing aapl would need to rise to 24% of the index before this would be done. I always thought of the qqqq's as being one of the more balanced ETFs, but this is not the case. It is almost like you should not bother with the qqqq's and just buy appl instead.
This highlights that for ETFs it is critical to check the holdings. They often are not as diversified as they sound. If you were for example under the belief that apple will continue to decline for company specific reasons, but all the other large cap tech stocks will do well and because of this belief you buy the Qs, then you will not perform as desired. That aapl component in the Qs you bought will restrain the gains you may see in the other stocks.
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http://www.powershares.com/products/overview.aspx?ticker=qqqq
we see that apple by far dominates the index by making up 10.74% of it currently (note this changes daily). We currently have the case where the qqqq is a slave to apple. When apple does good so do the Qs, but when it doesn't the Qs will have trouble overcoming the pressure applied by aapl.
Other NASDAQ-100 holdings
Apple Inc. 10.74%
Microsoft Corp. 6.95%
Google Inc. (Cl A) 5.34%
QUALCOMM Inc. 5.17%
From the NASDAQ website i see that they review the holdings quarterly, but given their criteria for doing a re balancing aapl would need to rise to 24% of the index before this would be done. I always thought of the qqqq's as being one of the more balanced ETFs, but this is not the case. It is almost like you should not bother with the qqqq's and just buy appl instead.
This highlights that for ETFs it is critical to check the holdings. They often are not as diversified as they sound. If you were for example under the belief that apple will continue to decline for company specific reasons, but all the other large cap tech stocks will do well and because of this belief you buy the Qs, then you will not perform as desired. That aapl component in the Qs you bought will restrain the gains you may see in the other stocks.
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A little bit of a gamble?
Or a sure thing? Today i purchased one Google put. My logic, or lack their of, was that they have been one of the annointed 4 horsemen of the market like apple, and given the beating apple took after they met numbers and lowered guidance i believe there is a reasonible chance Google is due for the same outcome when they report next week. It is also interesting that apple did get beaten up pretty bad before they reported, just like google is now.
Now given that buying or selling a stock right before they report numbers is more akin to gambling than trading i have bought only 1 lonely put option. But given that 1) we are in a bear market and as such bear rules apply, such as good news is bad news and bad news is horrible news; 2) Google is priced to perfection in terms of the expectations for growth and as such any lowering of the forcast will have a significant effect (see my earlier post about the PEG ratio); and 3) from a technical basis goog is breaking down and the rally yesterday looks like a great short entry because it rallied into the declining moving averages.
Check back next Friday for the results.
Now given that buying or selling a stock right before they report numbers is more akin to gambling than trading i have bought only 1 lonely put option. But given that 1) we are in a bear market and as such bear rules apply, such as good news is bad news and bad news is horrible news; 2) Google is priced to perfection in terms of the expectations for growth and as such any lowering of the forcast will have a significant effect (see my earlier post about the PEG ratio); and 3) from a technical basis goog is breaking down and the rally yesterday looks like a great short entry because it rallied into the declining moving averages.
Check back next Friday for the results.
Wednesday, January 23, 2008
the fear shows it's face today ...
It looks like the shorts got a little panicked today and rallied the market to the close. What? Don't you mean "bargain" hunters came in and bought the market? NO!
To understand this you must understand what it means to be bearish or a bear. A bear believes the market will go down and furthermore a bear usually positions himself to profit from this decline in the markets.
The current markets have been controlled by the bears and are STILL controlled by the bears. As a bear you tend to short the market. This means you borrow stock to sell. You hope to profit by buying back the stock at a lower price and hence profiting. This is a really hard thing for novice market players to understand, but critical to understand what is going on right now. You sell first, then buy back the stock. You must buy back the stock at some point and if the stock keeps going up your potential losses are infinite. So when you are shorting you must be careful and quick on the buy trigger. You do not short and log off your computer for a year.
My guess is the pace of recent declines had some wanna-be shorts enter late, like Friday and Tuesday. These shorts are in a risky position because we are nearing some major support levels and we have already had such a large sell-off we are very oversold. So my guess is that as today went on and there was no continued sell-off they realized we were not going to crash. Slowly as some of the longer term shorts started taking profits the short term shorts rightfully panicked. Hence the rapid 300 point rise in the last hour or so. Bargain hunters are more apt to buy a little over time and will try not to rally the market. They have big money and are not as agile. There is with no certainty that you can say this is exactly what happened but it is more plausible than saying bargain hunters rushed-in. You have the tape and that is all you have to try to figure out what is going on. The tape points to a short cover rally.
Why is this important? Why is it important to know that it was shorts covering vs. bargain hunters? Well if bargain hunters did come in that would be a more positive sign for sustainability of the gains. The reason is the true bargain hunters have a longer time frame in mind than the bears covering their shorts. The bears are just as likely to enter tomorrow again with more selling. The point being. True bargain hunters portend a stable sustainable bottom, shorts covering portend more declines to follow.
If you look at the fact that shorts face infinite losses, you can easily put yourself in their shoes and see how they could quickly be faced with the need to buy at ALL COST. Buying into a 200+ point rally is more likely to be someone covering a short, than a bargain hunter.
So what you are seeing is fear driven buying vs. fear driven selling. The reason there is a lot of volatility right now is that it is a bear market which by definition is controlled by the bears. Since the bears have very itchy trigger fingers they move the market very fast both ways. It's chasing greed on the way down and fear on the way up.
Don't get caught in false rallies. There are many people short now so i would expect a significant rise over the next week or so, but to me it is a shorting opportunity as this is not yet done. The bear market is just starting.
When it comes to being a bear, i frankly am an expert. I have been mostly bearish for many years and as such when i talk about what the "shorts" are facing I'm really talking about me.
--
To understand this you must understand what it means to be bearish or a bear. A bear believes the market will go down and furthermore a bear usually positions himself to profit from this decline in the markets.
The current markets have been controlled by the bears and are STILL controlled by the bears. As a bear you tend to short the market. This means you borrow stock to sell. You hope to profit by buying back the stock at a lower price and hence profiting. This is a really hard thing for novice market players to understand, but critical to understand what is going on right now. You sell first, then buy back the stock. You must buy back the stock at some point and if the stock keeps going up your potential losses are infinite. So when you are shorting you must be careful and quick on the buy trigger. You do not short and log off your computer for a year.
My guess is the pace of recent declines had some wanna-be shorts enter late, like Friday and Tuesday. These shorts are in a risky position because we are nearing some major support levels and we have already had such a large sell-off we are very oversold. So my guess is that as today went on and there was no continued sell-off they realized we were not going to crash. Slowly as some of the longer term shorts started taking profits the short term shorts rightfully panicked. Hence the rapid 300 point rise in the last hour or so. Bargain hunters are more apt to buy a little over time and will try not to rally the market. They have big money and are not as agile. There is with no certainty that you can say this is exactly what happened but it is more plausible than saying bargain hunters rushed-in. You have the tape and that is all you have to try to figure out what is going on. The tape points to a short cover rally.
Why is this important? Why is it important to know that it was shorts covering vs. bargain hunters? Well if bargain hunters did come in that would be a more positive sign for sustainability of the gains. The reason is the true bargain hunters have a longer time frame in mind than the bears covering their shorts. The bears are just as likely to enter tomorrow again with more selling. The point being. True bargain hunters portend a stable sustainable bottom, shorts covering portend more declines to follow.
If you look at the fact that shorts face infinite losses, you can easily put yourself in their shoes and see how they could quickly be faced with the need to buy at ALL COST. Buying into a 200+ point rally is more likely to be someone covering a short, than a bargain hunter.
So what you are seeing is fear driven buying vs. fear driven selling. The reason there is a lot of volatility right now is that it is a bear market which by definition is controlled by the bears. Since the bears have very itchy trigger fingers they move the market very fast both ways. It's chasing greed on the way down and fear on the way up.
Don't get caught in false rallies. There are many people short now so i would expect a significant rise over the next week or so, but to me it is a shorting opportunity as this is not yet done. The bear market is just starting.
When it comes to being a bear, i frankly am an expert. I have been mostly bearish for many years and as such when i talk about what the "shorts" are facing I'm really talking about me.
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