patrick.net

According to experts, the contracts may naturally settle into backwardation.

http://riskmarkets.blogspot.com/2006_03_01_riskmarkets_archive.html

So you get "paid" holding a leveraged long position?

Why bother dealing with negative cashflow and damn dirty renters? Why bother getting liar loans? Looks like housing futures will be a superior way to get "appreciation"-type RE exposure.

NOT INVESTMENT ADVICE. FUTURES ARE *VERY* RISKY INSTRUMENTS.

If you think that SF is more "immune" than San Diego, it may soon be possible to do a SFR/SDG spread. The possibility seems endless.

NOT INVESTMENT ADVICE

Well, apart from the inherent risk in trading derivatives, there is an additional risk in these futures. At least to me. The methodology behind the index is not all that clear, and I am not sure if it can remain free of manipulation.

Not that I really understand other future contracts, but at least I can make some naive assumptions. If price of oil goes up, USO, DBC will go up.

I need to read more on this. So for the timebeing, I will just be on the sidelines, slowly aquiring more information. But watch I will. Definitely.

Next, anyone with an interest in legislation-linked markets will take notice of the controversy over Congressional "insider trading". Currently, it remains legal and technically ethical for members of Congress to trade stocks based on nonpublic information related to pending legislation or appropriations. A study, Abnormal Returns from the Common Stock Investments of the U.S. Senate, by Alan J. Ziobrowski and others found that between 1993 and 1998, Senators outperformed the market by 12% per year on average, whereas corporate insiders beat the market by only 6% annually. Based on his analysis, Ziobrowski has concluded that, "there is cheating going on, at a 99% level of confidence."

jesus. i think politicians here have to declare all pecuniary interests in a public register, and very often have to sell off interests and shares in companies before they can take office, to avoid obvious conflicts of interest and the possibility of malfeasance. political understandings in america seem to assume that politicians are there exclusively to grease the wheels of business, and can skim what they like.

I wonder if any other politician has ever outperformed the market like the junior Senator from New York?

http://www.washingtonpost.com/wp-srv/politics/special/whitewater/stories/wwtr940527.htm

Hillary Clinton Futures Trades Detailed
By Charles R. Babcock
Washington Post Staff Writer
Friday, May 27, 1994; Page A01

Hillary Rodham Clinton was allowed to order 10 cattle futures contracts, normally a $12,000 investment, in her first commodity trade in 1978 although she had only $1,000 in her account at the time, according to trade records the White House released yesterday.

The computerized records of her trades, which the White House obtained from the Chicago Mercantile Exchange, show for the first time how she was able to turn her initial investment into $6,300 overnight. In about 10 months of trading, she made nearly $100,000, relying heavily on advice from her friend James B. Blair, an experienced futures trader.

The new records also raise the possibility that some of her profits -- as much as $40,000 – came from larger trades ordered by someone else and then shifted to her account, Leo Melamed, a former chairman of the Merc who reviewed the records for the White House, said in an interview. He said the discrepancies in Clinton's records also could have been caused by human error.

I meant to add bold to this too:

The new records also raise the possibility that some of her profits — as much as $40,000 – came from larger trades ordered by someone else and then shifted to her account

When insider trading just can't quite grease the wheels sufficiently you have to move straight to theft.

Housing futures?

When you're playing poker, look around the table. If you don't know who the sucker is, it's you.

Peter,

I'll start a thread on my blog today for tracking paper-portfolios with different housing futures strategies.

* Not blogging advice

whoops... I meant they could aquire 100's of millions of dollars worth of LAND... I didn't make that clear above.

Trading in general is a risk regardless of what the commodity/product/serice might be. Gambling with a diffrent name. Straight and simple.

Peter P/Randy H,

I was concerned as to how they were going to pull this off in terms of liquidity as well. The only thing I know is that the futures traders ALWAYS get things right in the end! Backwardation sounds intoxicating because there's nothing more boring than watching yet another option contract expire worthless. As for all the concern as to who the buyers will be I think that usually straightens itself out in short order. I realize this sounds simplistic but traders trade, that's just what they do! Example:

I get up at 4:30am after yet another night out with "the boys". My sports betting hasn't been going as well as I'd like to see (that's a whole other story) so I need 3 bagger today! I've tried shorting the Boston Metro market and that hasn't played out so well and yet the BA Metro hasn't budged to the downside. I think now that Boston has seen a 15% correction there just might be a "spring suprise" so in an effort to shake off this funky hangover I go LONG on Boston and take a short position on the BA. I'll hold that until around 11:00am and see if I get some play.

Just like gold traders these guys are always "in the market" and they will have long or short positions depending on how they feel that day. And when they don't know which side to take they'll take a small position just to get some action going and then make their judgement from there! In no time they'll have strips and straddles and butterflies and whatever else it is those guys do. (Remember if you want to score some dope just don't do it on the trading floor) that's what the parking lot is for. Now if I could just keep Cleavland from giving up 18 runs!

nomadtoons2,

Yeah, I guess so. Life's a gamble so I really don't know. I remember back in 1999 when Y2K fever was at fever pitch clients would ask me if I was concerned about it. I said, look this is September, December 31st is a long way off. They'd say, a long way off!? Then I would explain to them that I was just trying to make it to Friday.

Life is a gamble indeed. It just seems funny that many people focus enormous amounts of energy on stocks, trading, and market data when this same energy could just as easily be spent thinking of new ideas, inventions, business models, and so forth.
Perfect example: my dad. When I was growing up, my dad was unemployed. He had gone overseas during Vietnam, and did not complete college. So we were living off my mom's school teacher salary, which wasn't much. His solution?- Buy 2,000 pounds of marbles( yes, the nes kids used to play with), build a portable store out of a dilapidated camper, and go around various antique shows and flea markets and sell them. We did this for 5 years.He made enough to not only pay for his college, but enough to refurbich the house, mom's car, a new truck, and quite a bit left over. The best part about is was that we had fun doing it and it showed me the ropes to being a wise businessman. His dad did the same thing- he simply had a new idea all the time, and it usually paid off.
What's better is that when you make something like that, you control the risk, and when it works out, the satisfaction is high. I try to think this same way. I have several business ideas on the burner right now, and I am fairly confident that someday it will pay off. Forming new ideas is what got the US where it is now, but I think most people are simply happy to sit on the couch and throw money at stocks they've heard make money. Not to say that starting businesess is without risk, but if the brain power I see being used in the stock market was transferred towards physical development of new businesses, I would bet the national deficit would be by far less, and people would be more responsible because they would have to be in charge of their lives. Just my 2 cents. NOT BUSINESS ADVICE.

Peter P,

I still don't know how it can possibly work. Housing is real estate, they're by their very definition unique. How can a commodities market possibly trade in them.

My guess is that the futures will be comprised of the major new home builders, since like everything else in this country, is now composed of several large national buiding firms. I highly doubt the stocks would include individual exsiting developments. Interesting article comparing home builders to oil producers:
http://moneycentral.msn.com/content/P116192.asp

TN,

Couldn't say. Peter P has a nice link posted earlier and I understand that the Chicago Merc. is going to do some kind of "web cast" to indoctrinate traders in the basics. Start at CME, they should have links that say "open an account?" or something like that. Remember in order trade futures (as on margin) you will need to meet certain financial standards (ie. the ability to cover a call) so my guess is that initially these will be more for institutions and then they will "tailor" a mini for us small fish.

NIA

Nomadtoons2,

I'd take business advice from your dad.

nomadtoons2,

The markets are the fruition of our ingenuity. It's the money end of progress and somebody has to do it. Can it be a drag? Sure, but if you invented something new and wanted to bring it to the world (so we could all benefit) the quickest and best way to share it is through publicly traded markets. If you have an idea, bring it to Wall Street and if they like it you'll have all the money you need to get it off the ground!

Off-topic, I think I found a funny peek at the inside baseball of Patrick.net.

Get in your wayback machine, and check out the tailender spambots that have cropped up since this old thread died out: http://patrick.net/wp/?p=153#comments

Look at the posts starting on February 17th, 2006 at 3:03 am.

And I must add, I really am sojealous of this blog. You guys are great! Really, really great. I love your blog. Wow!

Mr. Vincent,

I think Mr. Shiller is being perhaps a little disingenuous with us here? I don't believe for a minute that anyone that works on that scale is all that concerned with John and Jill Homedebtor. Besides collecting the premiums for the additional rider on the policy would be a regal pain! If that side of the market develops then yeah, sure, whatever we'll take your money too but the truth is that this thing wasn't rolled out a moment too soon for the institutions eyeball deep in MBS.

Speaking of which do we have anyone perhaps lurking out there with any experience in insurance underwriting proceedures? We (or should I say I) could use some help here! I have friends on the sell side there and they often say they would love to be able to drop their P&C line and just do health care policies b/c the hassle just isn't worth it.

Dinor,
I don't disagree with a single thing you've said. Truth be known, the most likely path to instant money is via clever transactions through investments. I have a number of mutual and IRA investments. Nothing terribly risky, but I am counting on some of these to provide some of my retirement.
On the other hand, after being a salesman for 8 years, I can tell you that the best ideas are good ideas. The most sucessfull of good ideas are ones that are sold with good intentions, and serve to give the consumer more than what they paid for. Looking at the companies we trade today, almost all of them began via humble means. Good ideas from sincere people. These are the people- Like Michael Dell, Henry Ford, Bill Gates, and a thousand others who had an idea and took it to the bank. It's the millions of others trying to piggyback off of their sucess by buying a piece of their action.
Perhaps I am old fashioned, But my idea of sucess is becoming a person who makes ideas, sells them, and makes others want to buy from me- not the other way around.

nomadtoons2,

Hey, don't get me wrong here! I have a "corn belt" upbringing too! We believe in the things we can see and touch. During the great tech run up I was buying John Deere and Caterpillar shares. Many of the brokers laughed at me and I took a lot of grief. Now, many of those "tech traders" are out of the business and their clients are probably never going to invest in the market ever again. I'm not patting myself on the back here. I'm not some kind of visionary. I just sold what I understood and I didn't really understand all that much about tech world! Besides, I still like being around "big boys toys".

Do any of you guys think the big RE companies (Remax, Century 21, Prudential) will take positions in housing futures? Is there any way to know if they do? I'm guessing not. Would they be allowed to? I think they would know exactly what is going to happen to the market. Given that they have all the data for existing home sales with their fricken closed MLS, couldn't they make good educated guesses about what will happen on the CME?

By the way nomadtoons2, from the last thread: It really $ucks that you've gotten that sort of treatment in the BA. Sales is a difficult enough field to be in anyway. When someone casts you in a stereotype, its almost impossible to get out of it.

Newsfreak,

The most sophisticated investment I've ever made has been some kind of mutual fund for my IRA. Since I sold my house everything has been siting in a passbook account because the rates were decent and I was planning to buy again.

For those of us who are nearly ignorant about investing, can you explain what these futures are buying and selling?

I read your note that My guess is that the futures will be comprised of the major new home builders, since like everything else in this country, is now composed of several large national buiding firms.

Does that mean the futures will somehow sell short positions in publicly traded companies that build houses?

I would definitely be the sucker at this table because I have no clue. Can anyone explain it on the 3d grade level?

Everything in the (legitimate) market is either debt, equity, a combination of debt and equity, or a derivative based on an asset (remember assets = liabilities + equity).

So you should never take a specific position (undiversified, managed, or indexed) on _anything_ in the market unless you really understand that asset, whether it's a company, gold, or housing.

I'm not so troubled with the theoretical proposition of housing futures. There are lots of derivatives based on indices. And, every index has its legitimate critics. Even the DJIA has a lot of legit criticisms (over weighted, includes conglomerates, etc.).

I'm also not going to worry about manipulation of the index in the early days. It won't work unless its transparent, and the regulators will be watching it like a hawk. The worry will be later, after it's become established and everyone takes it for granted. I'd worry mostly about the big HFs trying to distort things, perhaps by shorting correlations to cause movement in the index? Something like that, but not for a while.

Scott,
Actually when I was in sales( which I haven't been for 3 years) having the "fine southern gentleman" accent was a plus. People seemed to trust the accent when I was selling things. There is a amazing albeit absurd, but common belief that southerners are honest- perhaps somehat stupid- but incapable of telling a lie when they hawk their wares. I was one of the more sucessful salesmen at my company. By cranking up the charm to Jack Daniels level, it worked wonders. I have found it doesn't work as well in the corporate world.

Nomadtoons2,

My father had a Gravely for YEARS! Built like a tank. The "play" in my mind was that while much of the U.S infrastructure has already been built out, the developing world still needed things like, uh, electricity and they needed heavy equipment to make this happen. Much of CAT and DE's sales are engineered through the the EX-IM Bank in Miami (I believe) so the U.S market has become more of a "service" oriented market with their true growth markets being overseas. Deere had developed a complete "agricultural mechanization" plan for China complete w/satelite guided tractors for maximizing use of arable acreage to feed their growing number of factory workers that were no longer plowing behind an ox. Some of the board members have been there for like 4 generations, unlike dot coms where the guy has been there for 4 weeks. This much even I understand.

*Not a paid advertisement for John Deere*

Scott J,

(Randy H help me out here)

I think it's called the "put to call" ratio. Yes the major RE houses (and lenders) are expected to take massive positions and this is a good thing. It will make RE much more transparent b/c when David Lerah is talking about missing out on the RE Boom on CNBC just call up the quote and you'll be able to see HUGE volume that suggests the players in that arena don't share his bullish sentiment. In short? He's full of it and now it will be there in "real time" for all to see!

Dinor,
My Uncle has signifigant investements in Deere and co. The company is somewhat profitable, but they will only remain so if they have sucess in China and beyond. The only problem is that there are already numerous well established Chinese and Indian brands that compete against them. My father actually helped with HR in a small and unsucessful small equipment plant set up by Deere in East TN a few years ago.
The biggest problem with Deere is that they make their products TOO WELL. My uncle has a number of tractors from the mid 60's that he still uses every day. The value of these actually go UP with age since they are deemed excellent products by many farmers. He even has a few old steel tine wheelers that he has in an old barn from the 20's. So unlike cars, they last 50+ years so the turnover is small.

Do any of the major online brokerages allow you to trade these futures?

Any brokerage specializing in futures should allow you to trade these.

I still don’t know how it can possibly work. Housing is real estate, they’re by their very definition unique. How can a commodities market possibly trade in them.

The housing futures to homes is like stock index futures to stocks.

Peter P,

Thanks for clearing that up. One thing we should remind ourselves is that where futures contracts are concerned we never actually take "possesion" of anything. People don't leave the "Merc" at the end of the day with bushells of soybeans.

DinOR,

You make a great point about being able to instantaneously call David Lerah (David Liar) on his bs. I like it! I should ask the "powers that be" in the bank for which I work about what they're plan to do. Of course they won't give me details, but I might be able to find out the magnitude of their involvement.

btw... I always wanted a John Deere, but growing up in the 'burbs of the BA automatically disqualifies one's family from buying one. A 15x40 lawn does not need any sort of John Deere equipment. Of course that lawn looks luxurious compared to the lawns that you can put on one of the new $hitboxes being built today.

newsfreak,

Buy him a flock of sheep :P

I am considering to write puts on it if
1. the options volume is large enough
2. the premium on the puts is high enough (as I expect it will be because the institutions buy them to hedge against their MBS/RE)

My reason to do this is that even though I believe there's a housing bubble, I don't want to it to be a all or nothing bet. In case the housing prices stay flat without major reduction, I would still be able to pocket some premiums on the puts.

Peter P,

So we're not dealing with houses at all, but some concept of house. So, is this just people gambling on overall house prices...so basically a derivative?

My head hurts. But that's okay, the important thing is I'm meeting new people.

nomadtoons2

"I have found it doesn’t work as well in the corporate world."

The Southern accent in my bank is/was never a hinderance to anyone of my co-workers. Perpaps we're like a government entity because of our size, so it's not allowed at all. The more I think I know things, the more I find I'm wrong.

Hmm... it's close to lunch on the west coast and since I've been thinking about the South, I'm getting hungry for country fried steak. Of course Peter P would say "SUSHI!". Well, if I lived in "high corn" like many of y'all I might be able to afford sushi for lunch.

Scott J,

This will definitely take the cheer out of cheerleading! Now, a guy can make his case that he feels the market is "oversold" and that his right to do so. In about 1 to 3 years we may be able to say that. What's happened here is that we've taken a "broken" system with "hit the number" appraisals and replaced it the consensus of a much broader market place that will be difficult to manipulate on a local level. Also, Scott, if you don't seem to know what's going on at work ask the swing shift janitor. He always seemed to know more about what was going on at work than I did anyway!

Nomad,

Have you ever picked up a manual push lawnmower? They seem ideal for the BA's small lawns and can be had for approx $150. But I've never seen one.

"what about sheeple futures?"

What for? indentured servants? I'm not sure I'd want anything that mindless.