patrick.net

I just woke up from a bad dream in which I am a boomer housing bull.

Max,

It's so crazy...it just might work!

I would have said sell short Toll Brothers, but as you can see you needed to do that six months ago:

http://finance.yahoo.com/q/bc?s=TOL&t=6m

Most of the downside of the housing bubble has already been baked into this share price as you can see by the chart, down $20.00 per share over the past 6 months. P/E multiple has contraced all the way down to 6.5ish which means Wall Street has already voted for the existance of the housing bubble with their money.

Hmmm, Centex might actually be a decent short, they have not been pummelled too badly lately:

http://finance.yahoo.com/q/bc?s=CTX

They are the most over-valued of the homebuilders based on trailing P/E. They are highly leveraged with a Debt-to-Equity ratio of 3.1, that should work against them as the housing market slows. If you look at their balance sheet you will see inventory piling up throughout 2005, not a good sign for the 5th year of a bull market in housing. Maybe not a bad short. Anyone else want to take a look and tell us what you think?

NOT INVESTMENT ADVICE AT ALL

Buy a home now, before it is even harder. It always goes up...

...wait, I forgot for moment that I lost my position with the CAR after Surfer-X and I came back ripped from a 7 martini lunch on the first day of work and he told the Board the true definition of animal husbandry.

---

My advice is to look for inflation protection outside of your house (your house is *not* an investment, in the real, non FaceReality/HITMAN/MP world), and preferrably not in gold (the real kind or EFT). The easiest thing you can do is pay down high-interest debts and save in reasonably safe variable interest and/or tax-free instruments.

And don't buy shit you don't need. If you need a new fuel efficient car, find the best value per efficiency, not the coolest hybrid, etc. Maybe skip the quail egg on your Uni also.

***YES INVESTMENT ADVICE***
***(I'm not an investment professional, so go ahead and do anything I say, if I'm wrong then too bad, you shouldn't have listened to me)***

I have been looking at subprime lenders, because they will fall hard in generating volume alone, regardless of whether they carry the loans on their balance.

Also, I believe that credit card companies will be very hurt when credit dries up and people start to miss their card payments. In around Nov 05, there was a BW article about how people started to put gasoline on credit card bills because of the price hike, and began missing heating bills to keep the homes warm. This winter had been the warmest, if we have one cold winter, all the problems will be exposed.

I am currently looking at CFC, it has several weaknesses:
1) Debt to equity ratio 8.2
2) Owns a big credit card arm and is a big subprime issuer
3) stock price still at the top - plenty to room to head down

Oh, and CFC CEO has been aggressively selling and cashing out options up till this very moment. Always a great sign to short a stock when you see the CEO and senior VPs sell like there is no tomorrow.

*not investment advice*

TOL is down, there are still home builders out there haven't come down at all!

BZH (Beaser home) PE 10.39, at a historical high this moment, CEO just cashed out 12M, negative operating cashflow, looks yummy, mmmmm...

Sunnyvale_Renter,

don't count on it, big bro Ben will inflate away your mattress money. He is not called Heli Ben for no reason.

Zimbabwe inflation at 613 percent...

http://www.businessweek.com/ap/financialnews/D8FOSAP84.htm?campaign_id=apn_home_down&chan=db

@SFWoman

You are right about inflation. The greater debate is between those who see a deflationary recession, and those who think the powers that be will choose to use inflation as an escape.

I am in the latter camp. I don't see deflationary depression in the future. Inflation is too easy economically and politically. Deflation will turn over the very status quo of the US body politic, and those in power know this.

There won't be hyperinflation like Zimbabwe, et al. Hyperinflation is defined as 1% per day, or an order of magnitude per year. This isn't anymore likely in the US economy than deflationary depression. For hyperinflation to occur, all our foreign debt holders would need to lose confidence in US assets, *and* (the important part) we'd need to keep trying to service this debt. If such a case played out, we'd more likely just default on the debts and take the nearly 80% of our GDP that's generated internally and shut the doors to the rest of the world. There is historical precident for this in the US, btw. Never forget, we are not an export economy. We can afford to survive alone better than pretty much every other developed economy in the world (Switzerland excepted). When faced with "destroy the country" or "destroy the world", we'd chose the latter.

@ Randy H,

Do you think during high (not hyper) inflation, we will see good rates on deposit accounts like people did in the late 70's? like 17% on a CD?

Do you think during high (not hyper) inflation, we will see good rates on deposit accounts like people did in the late 70’s? like 17% on a CD?

I do. I'm not sure we'll see 17% again, but >10% is not unreasonable. It also depends upon how much the risk premium changes, assuming there is a hit to the MBS and commercial paper sources of cash equivalents. I'm not convinced that there will be a wholesale collapse in the MBS sector as some here are. I do think it will be strained, perhaps heavily, though.

Other Homebuilders that haven't come down (because they haven't captured shorter's attention)

WCI: leisure oriented home builder (good sector to be in during recession, haha), 72M cash on hand with negative cashflow of 62M for 2005 05Jan-Sept, total debt 1.48B, P/E 6.51, man, this baby is ripe for lunch.

MTH, home builder concentrated in FL, CA, AZ, all the bubblish areas, price has come down 40% from the top, but still double that of 2003, P/E 8.18, debt 672M with only 40M cash on hand...

@ Randy H,

I'm thinking the saftest thing to do is to just stick with the U.S. dollar in FDIC insured accounts. Even if the Fed inflates in response to the bubble, at least higher interest on deposit accounts will offset some or all of the inflation damage. Stuff like gold or currencies (Forex etc.) just too risky in my opinion.

@Unalloyed

I agree, although I think there is a place for commodity indices and forex or hedge plays in a diversified portfolio (just not a lot of it). There is an upper limit to FDIC protection, even across a portfolio, so this only helps so much for many people. You can construct near-risk-free investments which don't rely upon FDIC protection, so this isn't a portfolio limitation.

@Gary Anderson

It is easy to make the "everything is global" mistake. The US is not as exposed to global deflation as meets the eye because we have independent real-rate power, which is only enjoyed by perhaps 3 economies in the world, us being by far the largest, and the most non-export economy.

If the world deflates, we can fight it with "Mercantile" measures. Don't get me wrong, it would really hurt, and a lot of people would lose their fortunes, but it wouldn't cause a grand depression unless we let it. We can live without the rest of the world, just at a much reduced consumer level. But if it comes to this (and I don't think it will), the rest of the world will be too busy trying to defend their borders to produce anything we'd buy anyway.

I am a newbie so pardon the stupid questions. I understand that in deflation cash is king. What about inflation ? So instead of a CD / MM account, what is a better alternative ? Not for completely investing cash into these, but a portion of it. People mention Gold. But it also has increased a lot. Is is too late to get into Gold ? Should stocks be avoided altogether ? Is there a better currency to buy (like Euro) and how to invest in that ? Foreign stock funds ?

Thanks for the help.

To BA Or Not To BA ,

honestly nobody knows the answer, if I do, I will borrow every single cent I can to bet in the right direction and become superrich after the bubble pops.

Therefore, keep a diversified portfolio. I am personally heavy in gold and silver, but I started getting in 2 years ago, so my base cost is significantly lower than the current one, and I haven't sold any of my PM position, just adding when there is a major pullback. It is also prudent to put some of your money into FX, Euro is safe enough, I don't trust Yen because it is manipulated too much. I am also heavy in energy (so taking a beating lately), but again, I don't recommend anyone to get in a big way at this point. Peak oil or no peak oil is not something that we can plan on, just put a bit money there in case there is a near-peak-oil situation.

Spread, diversify, don't just put ALL eggs in one basket.

I understand that in deflation cash is king. What about inflation

Cash was king during the Great Depression because (a) deflation increased the value of the dollar in purchasing power, (b) banks failed, so cash was great if you had it in your matress, and (c) there was a giant liquidity crunch, meaning no one could access dollars in the amount demanded.

Cash is also king in inflation if it is held in interest bearing accounts that (a) don't fail and (b) accurately track inflation, meaning that interest-parity holds. There can be a lag between rates going up and inflation going up, so you can lose out in the short run. This can happen when the Fed decides to break inflation also, like in the early 80s when the Fed dropped interest rates to kill off stagflation by pumping liquidity before it raised them again.

Cash is trash during hyper inflation, when you don't want any of your money in the national economy any longer than needed. This is what happened to Brazil when people seldom kept deposits for longer than 24 hours less they inflate away overnight.

Traditional shelters from inflation are real assets (including real estate) and non-correlated commodities (mainly gold). The fear is that this may not be true today because of what Peter P refers to as reflectivity. Gold, for example, probably doesn't shelter inflation anymore because it is so heavily linked to various derivatives and other electronic instruments. For an individual, the best hedges for inflation are fixed-rate debts, low debt ratios, and solid income with companies capable/forced to inflate salaries to keep employees. Employees with collective bargaining contracts can do well (note: I am excepting the whole inflation-bargaining trap phenomenon).

Think of inflation as a tax that you are forced to pay silently every time you buy stuff; the cost of government seniorage (printing $).

Owneroc and Randy H,

Thanks a lot for the advice. How do I invest in Euros ? Just buy bills from a bank and keep them under mattress ? Or should I invest some in mutual funds that buy european stocks ? Or something else ?

I’ll meet you in the hills and we’ll talk over a human-jerky lunch.

Mmmm... human-jerky. I wonder if it's even better than butterfish sushi?

Or should I invest some in mutual funds that buy european stocks ?

That's what I'm doing. It's a heck of a lot easier and less risky than trying to play currency day-trader on FOREX.

Don't buy bills from the bank. It is bad to keep money in your mattress unless you really by the Great Depression, the Sequal scenario. This goes for any currencies. The spread sucks at banks anyway, so you'll lose on the exchange rate you pay.

You can do Forex trading, but it's not for the faint of heart. I don't recommend it. Investing a portion of your portfolio in European index funds is a good alternative. Vanguard and others have good mutual funds that accomplish this. The problem with this strategy is that correlations between Euro and US market returns are converging, probably due to trans-national corps doing a lot of currency hedging on their own. You see, if the companies you invest in are hedging, then you can't hedge with them in your portfolio; you end up undoing/overdoing the hedge.

I keep about 15% of my total portfolio in non US investments, but less than half of that in Europe. The rest is divided up into smaller Japan, Asia, and emerging economies funds.

To BA Or Not To BA,

don't buy European stocks. I have some holdings in GIM(ETF close-end), or known as Templeton Global Income fund for mutual fund. It has NO leverage, has 0 USD exposure, and invests in high-grade foreign sovereignty bonds like Euro, Scandinavian, AUD, CAD etc. Last two years the yield was around 9% and it has been pretty stable. Just from the yield alone, it beats US Treasury, and you have the upside in case USD does tank.

I am also in BEBGX, again, mostly non-USD high grade foreign bonds. You can take a look of both to see if they fit your likings.

To BA Or Not To BA said:

People mention Gold. But it also has increased a lot. Is is too late to get into Gold ?

Suppose you had bought at $ 572/oz on 2Feb06. Right now at $ 545/oz your gold would be worth about 5% less than early in the month. That's like losing a year's worth of interest on a 5% CD in a couple of weeks. I think it's great to have some in your safe deposit box or to look at (a gold eagle is beautiful to hold in your hand), but not consider it an investment; too volatile and too speculative, plus it costs you to get in and out of it.
Just my .0000367 ounces worth.

Unalloyed,

you don't trade in and out of gold in a secular market. I have been accumulating since early 2004, just never let go. There were times that right after my adding, the value pulled back, you just hang on to it.

Japan and China have only 1.6% of their foreign reserve in gold, as compared to 20% for Europe and 60% for US. I think the long-term trend is very obvious. Of course, if you don't plan on holding your gold for at least 12 months, then don't bother. I have started accumulating for 2 years and never let go one ounce, and extremely happy about my position.

Frankly, I don't plan to let go until gold hits USD 2,200, which is the 850 historical high in 2005 dollar.

Owneroccupier,

I agree for the most part, but think that gold hitting USD 2,200 is a doomsday scenario. Around 1979-80 you had American embassy hostages in Iran, Russia invading Afghanistan, OPEC raising hell all at once. I wonder what it would take to send gold over USD 1,000. For me gold is something I hold in case of a doomsday event - like life insurance I hope I never need to use it.

Unalloyed,

I am not worried about doomsday, US is self-sufficient in food and water, and if ER does arrive to exterminate human beings, what is the use of gold anyway.

I am worried about HeliBen printing money like crazy. He is a self-proclaimed Great Depression Buff, and I spent some time reading his stuff before. It is very obvious that he has always thought increasing money supply can fix problems.

The USD 2,200 I am talking about is just a nominal value. In the last 7 years, the US money supply doubled. Starting from March, we won't see M3 reported any more. Who knows how much Fed is going to tax me through inflation? Although I agree with Randy that Weimer style hyperinflation is quite impossible, rampant inflation of 20% a year is well within the realm of reality. If money supply increases 20% a year for 2-3 years, I don't see any doomsday sentiment needed for gold to hit 2,200 NOMINAL value.

I am not planning to get rich, I just don't want to pay that much inflation tax.

Owneroccupier,

Watching Bernanke when he fielded questions, I noticed his eyes were directed downward when he gave some responses - like why M3 isn't a metric worth keeping public. My gut feeling about him is that he knows something that makes him uncomfortable, particularly regarding the issues of M3 and foreign held treasuries. And yeah, it is a bit creepy that he's an "expert" on the Great Depression.

Something that struck me, watching Ben in the hearings...he looks like someone who's shouldering some sort of burden...kind of sunken & reserved...like he's got this impossible problem in his mind 24/7 and he just doesn't know whether or not he can figure it out.
He also always looks tired...Sleepy Ben.

I just had a pleaseant experience. I flipped open the San Francisco Chronicle and on the front page with a rather dramatic bar graph with some tasty numbers showing that housing has slowed down to levels lower than 5 years ago. Here's a small tidbit:
"Last month, nearly 36 percent fewer houses and condos sold in the nine-county region in January compared with December and 20 percent fewer compared with January 2005, real estate information firm DataQuick reported Thursday. The month's total was 6,004; it usually ranges between 4,000 and 7,500."
Thus, as anyone can see, the bust has finally arrived, though a little late, to the Bay area.

I'll take a stab at the whole gold thing. For one, the gold standard has been erradicated forever. The Keynesian method has been used by governments for years since the depression to control reccessions and inflations. There has not been a serious recession in any country that has adopted this method either.
This kind of manipulation that you pointed out, while not great, is far from the only precious item that is abused. Debeers controls 90% of the dimond market. It is fairly well known that diamonds are fairly plentiful, and thus not nearly worth as much as the prce demands. Some say diamonds are selling at over 200% markup. Debeers isn't even allowed to have direct representatives in many countries including the US.
Perhaps this new Gold manipulation will cause a slight inflation, but I don't think it will cause a great deal of trouble, seeing as that the majority of the US public does not equivetate gold with monetary implications.

This is a sticky issue for me as I am sec. lic. So it's not like I can dole out inv. adv. and then say it's not. However; in general terms up until recently it's been difficult if not impossible to "short" broad sectors or even an index. Jeffolie has mentioned ProFunds which invariably make up a few of Morningstar's Best and Worst performing funds. How so? About half of their product line-up is "inverse funds" meaning bad news is good news! What might appeal to the more brazen crowd is that some versions are structured with 2 to 1 leverage. Dow down 1% for the day? You're up 2%. I've grilled the internal wholesalers and managers as to how it is possible to both short and leverage in an IRA account and they assure me that these funds meet the acid IRS's "acid test". PLEASE KEEP IN MIND, as mentioned by numerous folks here that leverage cuts both ways. You may want to close out your short position on Friday prior to the close and re-establish the position Monday at the open.

NOT FDIC INSURED AND MAY LOSE VALUE!

SF Woman,

I'm really torn by your by your latest observation. While I agree completely that the current demographic backdrop should provide the right environment for bio/pharma Pfizer for instance has struggled mightly for the last several years. In the 90's it seemed every quarter R+D's were rolling out "blockbuster" drugs. Many industry analysts (far more qualified than myself) felt that bio/pharma had become priced as much as 10 years into the future. I love this sector and will continue to throw money at it (although not w/both fists) as I have in the past. Where you may be 100% dead on is with Surfer X's vision of the "Autumn of Love" meaning Assisted Care Facilities etc. The "warehousing" of people isn't a pretty thought but someone is going to profit, why not us?

SF Woman,

There was a very "evil" quote in the Times article you linked us to! Eve Thompson, a broker said words to the affect, "I think alot of sellers are saying, I should make X percent". She goes on to say, "But your chances are about as good as going to Oracle and saying you would like more for their stock".

Firstly, Eve, please leave Oracle, Larry Ellison and the stock market out of it! We already have transparency O.K? Secondly, I wonder where sellers got the idea that they should be getting "X" from in the first place!

Really though, this is O.K. I work better when I'm pissed off!

Thomas Jefferson also said that no Democracy should be allowed to function without a total restructuring, a clearing of the plate, per say every 200 years.Democracy and Capitalism go hand in hand, and eventually "eat" themselves into obvlivion,For the only way to show progress is via growth, even if that growth is destructive. Thus, perhaps gold is somewhat related, but in my opinion, the whole system is in need of an overhaul, hence what we really need to solve the problem is a major depression on par with that of the 29' Crash. We may very well get that, and perhaps afterwards people will get serious and actually understand that a dollar is a dollar, and if you cannot afford something, then you shouldn't buy it. Simple.

Remember, the Fed Rate is the interest rate the Fed charges banks to borrow. They have to pay it back sometime. When that happens, the money that used to be flowing into the economy through lending will be flowing back into debt repayment instead. It’ll be impossible to get a loan. The value of the money in your savings account will go up. That’s the definition of Deflation, my friends.

This is an oversimplification that ignores a very critical part of the equation: what that credit is doing. If the credit simply sits, and then is paid back, sure there will be deflation. But it doesn't sit idle. Credit assumed by corporations is used to build the capital stock and improve productivity through investment (the macro-sense of investment). Consumer credit is usually spent on consumption. This drives GDP growth, which inflates, not deflates.

Deflation assumes that (a) consumers don't spend on consumption and (b) businesses cannot access credit capital for investment or become unwilling to do so.

I think the gold-manipulation theories are pretty much self-serving conspiracy theories, not grounded in much reality. There is certainly some anti-competitive stuff going on, which is the real target of the lawsuits. But this is good, old fashioned stuff like insider trading and collusion, usually perpetuated by speculators and operators, not by national governments.

Notice how the gold-bug arguments collapse into theoretical attacks on the fiat money system. This exposes a basic misunderstanding about what fiat money is, why nearly all systems evolve into fiat systems, and why fiat money is preferrable to intrinsic value money. We've explored this in earlier threads. In short, those who yearn for the utopia of "real money" are ignoring that fiat existed even in those regimes, mostly in the form of notes payable, backed up by legal enforcability. The current system is just a more efficient form of that mechanism.

auger-inn,

Look at what the debt, as enormous and disgusting as it is, represents in terms of US GDP percentage.

Defaulting on the debt would spell deflation for foreign borrowers, not necessarily the US. The US derives nearly 80% of its GDP activity internally. There would be probably some secular deflation, but not necessarily economy-wide, depression causing deflation.

Anyways, the holders of USD are not betting on the value of the paper. They are not betting on the implied value of gold reserves. They are betting on the US economy being better relative to other choices. I agree the USD is a terrible reserve, but it's better than anything else. If your economy is growing GDP YoY at 20% entirely through export, and you need to accept something as payment that you'll need 20+ years to realize without wrecking your economy with massive inflation, then what do you bet on? Hint: the answer is not gold (unless you're willing to sacrifice GDP growth).

It might yet, but so far, businesses have been spending their money on stock buy-backs and M&A, not plant and material.

PPE spending is only one component, and an ever diminishing one as the tech/service economy marches forward. M&A activity by definition improve productivity. Stock buybacks free up capital for more efficient allocation.