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Some Indicators


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2006 Jul 25, 2:46pm   17,052 views  197 comments

by Randy H   ➕follow (0)   💰tip   ignore  

ITB
XHB

Homebuilders not looking so good. An early indication of a sharp decline to come? A "hard landing" perhaps?

Chart #1 is ITB: iShares Dow Jones US Home Construction
Chart #2 is XHB: SPDR Homebuilders

IYR
ICF

Broader real-estate indices have yet to turn so negative, though.

Chart #3 is IYR: iShares Dow Jones U.S. Real Estate Index Fund
Chart #4 is ICF: iShares Cohen & Steers Realty Majors Index Fund

** Important note, charts #1 & #2 have significantly less data and are relatively new ETFs, so the early part of the charts may reflect a lack of liquidity more than true underlying value.

If you're not familiar with ETFs, which is what these graphics are charting, they are simply industry-focused "mutual funds" which trade like stocks on the market. They provide a nice way to get a quick read on the health and direction of an industry or sector.

  • Click charts to see the large versions. You may have to "zoom" in your browser depending upon your screen size.
  • Traders, quants, experts, chartists, fundamentals-ists and geeks: dispute these metrics and suggest better ones.

--Randy H

#housing

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1   StuckInBA   2006 Jul 25, 3:20pm  

Interesting thread idea. Here is my take.

The homebuilder stocks have already priced in a lot of bad news. The only question is, is ALL the bad news priced in there ? That's the debate that often goes on on Ben's blog. At this point, I am not shorting these stocks. I was, when TOL was at 50. I covered mine too early, but heh, small profit is better than a loss.

I don't think they indicate any type of landing clearly. There is enough disagreement on their valuation as of now. Some say they are now fairly valued, some say they are a bargain (Barron said that about TOL, when it was at 30), while some say they are going to fall more. So that's all there is to it IMO. Just a debate on valuation of an industry in decline.

2   Randy H   2006 Jul 25, 3:27pm  

The FT had a bit (Lex Column?) last week about these stocks potentially being value traps. In that case, they'll fall further. That said, I'm not shorting them either. Even my RE sector neural net model has yet to produce convincing short signals...and the flaw in my neural models is that they seem very "short happy".

3   StuckInBA   2006 Jul 25, 3:35pm  

Oh, I wanted to add about the other charts too. I am not sure the REITs will fall though. First of all they are mainly in commercial real estate, with some apartment/rental residential properties. These provide cash flow. Very positive cash flow. Which generates dividend for investors.

I am a novice when it comes to REITs. But AFAIK, they only loosely correlate to residential ownership RE. So they can actually go up even when residential RE prices go down. Esp for those who own apartments.

In fact, on MSN investor, the ETF guy (Tim Middleton) is advocating a place for REIT in our portfolio. And he is bearish on equities, and thinks we are in a secular bear market. He writes some interesting articles. He is not a typical bear - he hates Gold. Says cash is going to be a good place to keep money. Says avoid emerging markets completely.

Kind of like Randy H ;-)

4   StuckInBA   2006 Jul 25, 3:38pm  

In case anyone is interesed in Tim Middelton's take on REITs

http://tinyurl.com/hgyzy

5   Randy H   2006 Jul 25, 3:42pm  

TBAoNtBA,

Just for the record, I do have some gold and other commodities in my "active" portfolio. But the allocation is very small, and I take profits regularly. I put them in because they really help perturb my neural model. I also have about 5% emerging in my SEPIRA, but I've had that amount for the past 9 years.

I agree with your REIT comments. Interestingly, a regular here who's said quite a bit about professional income real-estate management (and has apparently done quite well by it) insists that commercial RE is strongly correlated to residential RE. Clearly, REIT action contradicts his assertions.

If either of you guys wish to share any tech insights into this topic please feel free to visit my blog. I usually try to keep the boring ultra detailed discussions separate from this blog.

6   StuckInBA   2006 Jul 25, 4:07pm  

Randy,

I know your views on Gold. I was just taking a dig at you.

Coincidentally, the investment "Guru" (sarcasm intended) Robert Kiyosaki, today wrote an article on yahoo about Gold. He does not present any new ideas, just rehashes everything discussed on blogs. But I have to give him some credit, he is going out on a limb and making predictions. We will see what he says, if he is proved wrong.

http://finance.yahoo.com/columnist/article/richricher/7810

7   tsusiat   2006 Jul 25, 4:25pm  

To BA Or Not To BA -

I can't remember where I saw this, but I remember reading a classic sucker play is to believe that, just because a stock is trading at 52 week lows, that it can't go a lot lower.

If the perfect financial storm hits housing, Randy's charts will look different in the fullness of time.

8   Different Sean   2006 Jul 25, 5:08pm  

housing starts is an interesting stat. if they are down, what does it suggest? a) that demand for housing has pretty well been met by current construction levels? or b) that people can no longer afford to build at current land prices, which might lead to a price softening? (but then you hit the wall of price stickiness and land vendors' reluctance to take less than last year's prices.) or even c) that land releases and approvals by local or state govt have slowed?

only b) suggests the possibility of a significant price drop. i.e. wealth and borrowing capacity has been exhausted in the community, hopeful specuvestors have now been burnt by the market (low rent returns, etc) and are retreating, and prices will need to fall to make a sale at all with the remaining pool of purchasers.

9   Different Sean   2006 Jul 25, 5:12pm  

my half-forgotten point was to differentiate a 'hard landing' for building company stocks and the home building sector, vs a 'hard landing' for residential housing prices. is there any connection between the two to speak of? not necessarily...

10   Different Sean   2006 Jul 25, 5:50pm  

Kiyosaki says:
"Mining a Hunch

In 1996, I founded a gold mining company in China and a silver mining company in South America. Both companies eventually became publicly traded on the Canadian Exchanges.

I formed gold and silver mining companies then because I believed that gold and silver were at "lows" and were set to come back up. At the time, gold was around $275 an ounce and silver was around $5 an ounce. If I'd been wrong, I would have lost the mines."

it would be very worthwhile finding evidence that kiyosaki did any of that. john t. reed suggests that kiyosaki wasn't doing anything much in the mid 90s except failing to sell his first book and having a go at a second, where he invented 'rich dad', along with messing around with amway and scientology somewhere along the line. he had been bankrupt in the 80s. his name appears as the director of no companies in the US, despite his claims of 'turning around companies' and forming startups, but now it appears he floated them in Canada for some reason, altho why you would do that while living in phoenix is a mystery... more likely that he's picked through all the current goss and commentary on gold, then put forward another set of his dumb suggestions, and reinvented his past again to make himself look prescient.

11   Different Sean   2006 Jul 25, 7:34pm  

ajh Says:
I think the listing rules for mining companies are (or were) more, ummmm, ‘relaxed’ in Canada than in the US.

yes, but you notice that he never names any of his alleged 'companies' in his articles, or in his books. it makes it very hard to believe any of his claims. his one claim to a company was that he was a 'top 5 guy' at xerox, altho he acted like a bottom 5 guy everywhere else before that. i think he vacuumed photocopiers for a living for a while, polished a few lenses, something like that... i don't know why magazines and internet sources just publish everything he says as gospel, without checking his claims first, same as james frey or milli vanilli or whoever...

12   Different Sean   2006 Jul 25, 11:44pm  

how do you short? is that capitalising on a downtrend? (my investment house does all my work for me... ;) )

13   Randy H   2006 Jul 25, 11:48pm  

In my humble opinion Kiyosaki is a bona fide fraud. There's just too many dubious circumstances surrounding his claims to be coincidence and bad luck.

George represents the classic example of a smart short. Shorting is probably the most emotionally charged type of trade a non-professional can make; certainly it is the most dangerous (most people don't write naked calls in their life). But when you really understand a company and its industry well -- even better than most of the analysts covering it -- then you can do very well with a strategic short here and there. This is the same reason I don't short gold ETFs even when I know they're probably trending down. I'm not a gold market expert and I know I'll end up panicking.

14   Randy H   2006 Jul 25, 11:55pm  

DS,

When you short you are borrowing your broker's shares and selling them. Your broker in return charges you a margin rate for doing this. So to make money the stock you short has to drop by enough to cover commissions on both ends and margin fees while the short is open.

Shorting is theoretically very dangerous because there is a limitless loss potential. If I short S at $10, I can only make $9.99 as it falls to $0 in profits. But I can lose INF as it rises to INF. Realistically, your broker will give you a margin call and force you to make good before that, but not before you lose a ton of money.

It's often a good Idea to short coupled with buying a Call option as "insurance".

15   Randy H   2006 Jul 26, 12:34am  

MA,

Do you mean Write a Put or Buy a Put that is well in the money? Buying a put far enough in the money to protect a short is usually not cost effective. In contrast you can usually buy an out of the money Call for a nickle. Writing either is probably not advisable for a retail investor (usually you need a higher option trading level to even do so).

16   Michael Holliday   2006 Jul 26, 12:46am  

Randy H Says:

In my humble opinion Kiyosaki is a bona fide fraud. There’s just too many dubious circumstances surrounding his claims to be coincidence and bad luck.
_____

I'll assume what you're saying is true, since your knowledge and credibility are demonstrated on this board on a daily basis.

Look at how many people fawn over and love that wily, little critter Kiyosaki.

Ha, ha!

He's laughing all the way to the bank & pimpin' it all the way.

Really, he's a walking, talking alegory of fame and wealth over integrity
and honesty if I've ever seen one.

Just make money, who cares how you do it, and get famous.

In other words, has he sold his soul? I think this is what they mean by the term.

17   DinOR   2006 Jul 26, 1:01am  

Michael Anderson,

Am I understanding you correctly? "There are some brokers that let you buy puts and calls in non-margin (IRA) accounts".

Really? This would be new to me. In order to have an acct. trade options you have to be option approved. Seperate form, along with a "hypo" or margin trading agreement. To my understanding it's not an SEC or NASD directive (it's the IRS). I have found but FEW exceptions and I think it's only b/c the IRS doesn't fully understand a leveraged (and inverse) fund. There are a few "Option ETF's" but b/c they have daily liquidity and are professionally managed I think the IRS just says, "whatever". There has to be assurances though that there is no way to incur a margin call in an IRA. In essence "covering the call" would/might constitute an excess contribution. If you've figured away around that I'm all ears.

18   DinOR   2006 Jul 26, 1:15am  

Conor,

I'd have to say that you are right on. Shorting for your own account is all fine and well and I've done it (as well as for clients) over the years but there is a TON of liability. I realize this may tick some folks here off but it's been my experience that when things are rock and roll everybody is fine with how margin is structured. When margin calls and sell-outs come into the picture all of a sudden the client conveniently doesn't understand how margin works! As in, I smell a lawsuit. There are plenty of people out there that go out of their way to misrepresent themselves as sophisticated enough to be allowed to be put on margin (IPO's etc.) but when things hit the skids the suddenly become this innocent. Believe me, it's not the BROKERS that f'd up margin. Most full service firms prefer not do it except for their best long term clients, if at all. This is why we now have the "cookie cutter" financial services that are so easy for discounters to take pot shots at.

My favorite scumbag is the guy that calls the first broker in the yellow pages and says "open me an acct. and buy me X # of shares in XYZ (just before earnings of course). If it pans out the guy says, "you know what, just sell it and send me the difference". If it doesn't pan out? Yeah, uh huh, the broker eats it. Scumbags.

19   FormerAptBroker   2006 Jul 26, 1:27am  

Randy H Says:

> In my humble opinion Kiyosaki is a bona fide fraud.
> There’s just too many dubious circumstances
> surrounding his claims to be coincidence and bad luck.

Then Michael Holliday Says:

> I’ll assume what you’re saying is true, since your knowledge
> and credibility are demonstrated on this board on a daily
> basis.
> Really, he’s a walking, talking alegory of fame and wealth
> over integrity and honesty if I’ve ever seen one.

As John T. Reed (an honest straight up successful Real Estate guy) has pointed out in detail on his site Kiyosaki has stretched the truth a number of times to make himself sound better, but everything he says is not total BS (he does make some good points). He is trying to sell books and will sell more books if he writes “I was a number 5 guy at Xerox” rather than “in a small Hawaii copier office with six sales guys I was not in last place since the number six guy was related to the owner and smoked pakalolo all day” When he writes he “founded” a gold mining company he probably made a typo and meant to write “found” a company (while reading magazines in the library since he was out of work)…

20   DinOR   2006 Jul 26, 1:33am  

MA,

Yes you CAN write covered calls BUT anything "uncovered" is considered illegal as per the IRS.

Writing covered calls is about as exciting as "kissing your sister". Why would anyone take the bother to set up a seperate acct. at a discounter to do that? This is just any case of discounters feeding the inv. public "woof cookies".

I remember in the 90's the home page for E-Trade said Double Your Profits! Click here (and then they'd take you to a margin sign up page). This is how discounters make their money, off of margin interest!

I don't see how these guys survived. Even in the 90's they spent about $300 in advertising to acquire a client. Most of these guys blew themselves up BEFORE they generated $275 in commissions! Great business, how do I get in?

21   edvard   2006 Jul 26, 1:39am  

All I know is that of the 5 or so reports that came out this week, my interpretation of them was that statewide, sales are down once again by almost 30%, inventory is still piling up, foreclosures are up, prices in some parts of the state are inchingt slightly down, and in my hood, nothing, and I mean nothing seems to be selling.
So.. we can debate here all we want, but the truth is that what has been said by people like us foe years is coming entirely true. We don't have to use complex analytics or theories. The basic background of our idea of what will happen is happening on very simplified terms: Investors overinflated the market, propping the market up for an additional 2-3 years, intrest rates are going up, and people now see that the party is over. The prices will start to fall heavily by this fall and winter. There will be no soft landing, and the economy will likely have a period of bad performance. The unemployment rate will skyrocket in construction heavy areas, and people that worked hard to save, act wiselt, and invest in their careers like we did will have our day, which was a long time coming.
Speaking of gold, indeed there is a rebirth in procuring new sources. Me and my wife love going up to Auburn, CA. There is a state park there that's in an old mine. The interesting thing is that there are many of these in the region. Many shut down in the 1940's and 50's. With the surging prices, there are several that are going to reopen and begin mining operations once more, quite possible including the mine that the state park sits on simply because the land " under" the park is still owned by the mining corportation.

22   DinOR   2006 Jul 26, 1:41am  

MA,

There is a fund company that has "inverse" funds that short AND use leverage so a 50K acct. just became a 100K acct. I know, it goes against everything we've been taught for years but this has stood up to the IRS "acid test" as it trades on it's NAV and can only go to "zero". I've challenged the guys at Rydex repeatedly and I've never had their holdings trigger any kind of an audit issue. I'm not bad mouthing options in general but this is just so much easier and there's no need for a "specialty" acct.

23   DinOR   2006 Jul 26, 1:57am  

MA,

That's largely b/c they aligned themselves with the very same "traditional spread banks" they claimed to have set out to abolish. It's actually now "TD Ameritrade" as in the "old" Toronto Dominion Bank. What this all boils down to is that very little if any of their profits come actual trading. Even Chuck has struggled mightily after defecating on the full service side of the business they are now frantically attempting to up grade "do it yourselfers" to full service/consulting etc. with virtually NO success.

24   DinOR   2006 Jul 26, 1:59am  

Bob,

Uh, my sentiments exactly.

25   DinOR   2006 Jul 26, 2:06am  

MA,

All I was trying to share is that by touting the ready availability of TRADING OPTIONS! (in your IRA) this is yet another desperate bait and switch tactic that discounters love to use. I mean, let's be honest here, when you have discounters enter ANY arena the only thing they can compete on is price. Once they've driven that down as far as they possibly can the only thing that's left is bad mouthing everybody else in the industry and attracting assets through this type of deceptive practice. By the time the avg. ETrade client has figured out he can't really leverage his IRA they already have the assets!

Look, I really couldn't care less what these guys (or their clients) do. Total assets at all of the discounters still don't add up to rounding error to the wires.

26   DinOR   2006 Jul 26, 2:17am  

George,

HARM likes to refer to these as "because we can" fees. Believe it or not the scenario is not markedly different here in OR. The "up scale" sub-d nearest me charges about 85K for a buildable lot (all in). They recently updated their "because we can" fee from 16 to 20K. All of this from a state that usually ranks about 38th in per capita income. Great.........

27   Randy H   2006 Jul 26, 2:17am  

I don't think derivatives belong in tax deferred retirement accounts. Then again, I'm old fashioned when it comes to retirement savings. I won't even touch ETFs yet with my SEPIRA, and I use Vanguard.

I certainly don't wannabe a trader. By "active trading" I mean a couple few a week with monthly rebalancing. Anything more doesn't cover commissions or the value of my time.

28   edvard   2006 Jul 26, 2:19am  

Michael,
I don't know 100% if the fall will happen this winter en' force, but to me, if sales are sliding in what's supposed to be the hottest time of year to sell, then that tells me that things will likely not get any better for the slow season. I don't see anything really improving as far as sales go, and we're only a few months away from fall.
That said, I wouldn't be surprised if some areas are more stubborn than others. States like Florida are already having massive reductions. California has only one area that has gone down very slightly. As George pointed out a while back, CA might be as much as 12 months behind Florida. I think it's more like 6 months, but we'll see. Anyway you cut it, it does appear that the atmosphere has changed dramatically in just a few months from: " yes, things have slowed" to:" Things are still slow" to: Holy crap, things are getting bad, I gotta sell!"

29   DinOR   2006 Jul 26, 2:46am  

MA,

One way around that would be to set up a trading firm as either an LLC or a Sub S to skirt tax issues. (Yes, I know, *astrid* believes this should all be treated like a pay check). The truth is that you/your clients would have all the lattitude in the world AND it adds an extra layer of protection for you as an adviser.

My father always told me, "If you're going to do a crime, plan it from the witness stand backward". (Meaning assume you'll be caught). God forbid this were to wind up in litigation the arbitration panel will look at the title block on the acct. form, see that they have filed articles of incorporation (complete w/corp. seal) and say "Next case"! I'm not by any means implying options trading = criminality but when it comes to money, everyone's an a$$hole!

*Not Legal Advice?

30   DinOR   2006 Jul 26, 2:50am  

Randy H,

Yeah, what's up? I'm popping ETF's like candy in my SEP! They're cheaper, more concise and more fun! While their popularity has surged in recent years (they are actually older than "open ended" funds).

True, the NASD has clamped down on a lot of this "back tested data" track record stuff but still and all they're a great deal.

31   DinOR   2006 Jul 26, 2:56am  

MA,

100K price reduction hasn't sparked ANY interest? But Bend is so HOT! It's "white hot"!

The Sunday Oregonian just ran a huge feature on how 2nd. homes in general and Bend in particular were going to do nothing but continue to benefit from the aging boomers. (Nothing like on site intel.)

32   edvard   2006 Jul 26, 2:57am  

Michael,
I'm going to place my bets on the fact that people are easily persuaded by the media. The papers, networks and sites ( especially sites like these) have probably done most of the erosion in the buying public's confidence. For years it was the "unstoppable RE boom". Just in the last year they've changed their tune to the drama filled unfolding events that are the foundations of a new, hot, soap opera drama that'll be sure to grab attention: The RE implosion and all the woeful stories about homeowners and so others in serious problems.
Basically, the public has been shifted into a new mode of though concerning RE. It's no longer the miraculous machine it was for the last few years. They knew the risks and heard the warnings. The kind of people that risked everything to invest in bubblicious housing are also the types of people who will want to ditch the fastest. They have to because they only had one plan for the homes they bought which was to sell and pocket the profit, and only the profit in the form of additional appreciation. Otherwise they're simply sitting on something they can't pay for or expect to even break even with. If you had the option of buying a car that would only be more expensive due to increasing car payments, would you do it? No, of course not, and neither are the approximatly 40% of the buyers in the last 2 years who made up the entire spectrum who bought only as investments.
That's why the fall will more than likely be hard and fast. These people do not have the option to simply hold. They will have to sell, and sell it fast. The public perception is now that housing prices will fall. If there is a massive amount of homes being sold at reduced prices, then buyers will hold off even longer because the perception will be that prices will tumble quite a bit.

33   Randy H   2006 Jul 26, 3:01am  

I probably shy away from ETFs in my Vanguard acct because they don't have enough history to produce valid statistical Monte Carlo simulations. Like I said, I'm very old skool when it comes to my SEPIRA. Just old fashioned, boring MVO and Monte Carlo. When the ETFs I have available to me hit a high enough RSQ and F-Test I'll include them too.

Call it waiting to see if anyone dies from the newly approved drugs first, if you will. It's more a hyper conservative reaction I have to seeing all my Midwestern elder relatives retire with nothing but the gov't to support them. I'm not going out that way.

34   Randy H   2006 Jul 26, 3:04am  

DinOR,

Not only do you get the tax advantages with S-elected corps, but you get a huge potential to make SEPIRA contributions. My last corp was a C and we still managed to hit the IRS max on SEP 5 of 7 years. That adds up pretty fast.

35   DinOR   2006 Jul 26, 3:08am  

Randy H,

I hear what you're saying and have been a little leery of some of the "offerings of the week" from I/Power Shares. A lot of their "track record" leans rather heavily on things that didn't even exist during their data sample period. But there are plenty of well established ETF's and when it comes down to it I only track a few.

36   DinOR   2006 Jul 26, 3:11am  

Randy H,

Exactly, and they're not near as arduous to set up as most imagine. The atty. does most of the work and it's very competitive so the fees are reasonable. Maxing out your SEP is the best feeling in the world.

37   DinOR   2006 Jul 26, 3:16am  

MA,

Bend is going to be a nightmare anyway we slice it! They're talking about adding 10,400 new jobs over the next 3 years! Really? Based on their esteemed opinion how many of those new jobs would have been in construction?

Don't get me wrong, I think Bend is purdy too but when it boils down to basic economics people will dump Bend like an ugly girl at a dance!

38   Peter P   2006 Jul 26, 3:50am  

For some reasons I still do not believe in retirement accounts.

39   HARM   2006 Jul 26, 3:51am  

I probably shy away from ETFs in my Vanguard acct because they don’t have enough history to produce valid statistical Monte Carlo simulations.

There's that, plus Vanguard's current offerings are still fairly limited. For RE, there's only a (commercial) REIT ETF. No homebuilder stocks, GSE or residential REIT ETFs --yet.

http://flagship4.vanguard.com/VGApp/hnw/FundsVIPERByType

40   Claire   2006 Jul 26, 3:54am  

Well we started a 401k, but I feel like that it's a bad idea - we have no control over when our contributions are invested, the funds don't correlate exactly with the funds on the xchange - I feel like the retirement firm can take us for a ride and charge us for it! What's to stop them form "buying" the funds (with our money), wait a few days and then "sell" us the funds for a profit? As well as charging fees etc

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