patrick.net

astrid,

(And I really was just kidding)

It's really pretty simple. When you're short, bad news = good news.

I'm much better now. During the lull I crank called a mortgage broker and asked him how IO mortgages work, pretended to be interested and then acted like my line got cut off. Hello, hello?

In terms of investment opportunities, I just don’t think enough people will understand housing futures to take advantage of it.

How many people understand the dynamics of investing in rental properties?

They just buy the darn thing and hope that it goes up in value.

With futures, it is even easier. It is literally one click away. The commission is not 6% or even 2%, it is likely to be $5 a round turn per contracts even for retail customers (on Globex). So the roundtrip commission of 1M worth of "housing" exposure (~20 contracts) is likely to be around $100.

NOT INVESTMENT ADVICE

who is going to participate in this housing futures market, and with what instrument? i.e. stocks are traded because a company explicitly issued shares in order to raise some money for itself to expand or for whatever other reason, and issues a dividend. All derivatives either require that you hold a tradeable stock or intend to get one if you don't. What's tradeable on a mortgage? Is it houseowners worried their price will collapse? Potential house buyers looking to buy a put option? Lenders? They're normally covered by thier own risk assessments and LVRs in case of a downturn. Aren't futures more or less traded on behalf of farmers in order to hedge against future unknown price fluctuations? (And other commodities.) Who is the underlying beneficiary of this exchange?

there are futures and commodities trades which would end up in you taking delivery of the commodity if you don't shift it smartly or cancel it with a covering position...

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

isn't it more of a gift from some more experienced trader, who actually knew what they were doing? anyway, the Repugnants are going to dig up any trace of dirt they can find if it looks like hilary is going to run for prez in 2008, what a surprise...

I never believed in the dotcom frenzy, there was no underlying value in the internet at the time - nothing meaningful was being sold or value-added...

the price of 92 octane unleaded fuel in oz has been about US$3.70 a gallon for months now... and the cost of living overall is generally higher on a lower average wage.

Sort of a 360 degree switch

It's still 180°, nomad :mrgreen:

So you bet long or short?

Yes. But with options on futures, there are even more possibilities. For instance, you can bet that it does not go down, does not go up, goes up or down, goes no where, ...

there are futures and commodities trades which would end up in you taking delivery of the commodity if you don’t shift it smartly or cancel it with a covering position…

I think this contract is cash-settled.

What about weather futures? How do you take delivery? :)

newsfreak,

Like you wouldn't believe! I actually read an article yesterday that was about a group of realtors and lenders etc. in Las Vegas calling an emergency meeting to address the rash of foreclosures and the even bigger wave they are expecting. They had this mortgage "guru" that was being treated like the second coming but I've read the guys stuff before and his program CAN work but it assumes you're on fairly solid financial ground to begin with. Sound like anybody you know in Vegas? Yeah, me neither! Well I'm sure there are those that are established but even if they were they went out and leveraged their solid ground for fluff and hot air anyway. It was great article and it really cheered me up. But that was yesterday.

Newfreak,
The thing that happened to my folk's yard was that it "reverted" to a pine forest, mainly because one of my dad's other ingenious ideas was to have an xmas tree farm. He planted 500 of them, they all grew up, so about 50% of the yard is now pine trees. He pruned all the lower branches, so now it looks like you're walking under a canopy of trees and you don't have to mow uner them at all since all the acid in the trees kills it. Actually, I want to live in the desert. No grass at all. That said, I get physcological relaxation mowing grass. Not sure why, but I can work out my innermost thoughts and worries while behind the wheel of a lawn tractor.

why gambling makes money—
the House
always wins.

Brilliant!

newsfreak,

Don't get me wrong, if it were Des Moines I would be equally delighted. If you've been following the tone of the articles written lately it has really changed in the last few weeks. As it became more apparent that there would be no "spring salvation" the tone is more like "poor bastards" or "we're only now seeing the tip of the iceberg" kind of a thing. Gone are they days of being on the fence about the presence of a bubble! The damage control is now being discussed in even the most mainstream publications. Like I say these housing futures could have been used yesterday!

The politician- bureaucrat-businessman nexus occurs everywhere in different forms.

yes, but voters in other countries don't like it when the pollies clearly benefit personally from decisions - either from insider trading, bribes, owning the property being sold to make a 40-storey tower, picking up a job with the firm they favoured so much in office, etc... some of the above are illegal, others are just unethical or questionable... but the revolving govt-industrial door is a lot worse in the states... e.g. lockheed martin cronyism, cheney and halliburton, etc... not counting the insider trading, jack abramoff affair, and general bribery of congressmen by vested interests ('campaign donors'), etc.

Peter P, DinOR,

These will be futures, not options right?

Just for clarification: futures and options are both exchange traded, but they are not the same thing. (Forward contracts are the same as futures, but not exchange traded.)

Futures have a long payoff that looks like a straight line, sloping up from left to right (on the hockey-stick graph). The short position is the inverse.

Options have the recognizable hockey-stick shapes.

The big difference is options have built in floors or ceilings, so you can limit your losses either short (betting on a drop) or long (betting on a rise). Futures work like stocks: you're losses aren't limited (except by 0).

There's no call-put parity stuff to a futures market, only an options market. Futures prices work simply as a decreasing function to spot price. That is the futures price is higher/lower than spot at time t = 30, but the difference diminishes as time gets closer to t = 0, that is the future becomes the spot on its maturity date. The difference reflects volatility and consensus as related to future price expectations (obviously).

Futures market is a derivative market, because you're not generally trading the real asset. However, futures contracts are potentially deliverable, which drives the price. The market must behave or if it doesn't, all the futures contract holders would demand delivery (if they could make more money taking the commodity, for example). There are examples of futures with which deliver is normal, however. This makes futures markets a bit special from options markets (where you have no residual claim on the asset directly, only indirectly).

One last thing, Taxes are brutal for futures market gains. Short term gains (and most are) are taxed as ordinary income. Capital losses are a complex formula of this and that IRS mumbo jumbo, which you need to pay someone to do for you.

Most people have some exposure to futures markets in the form of currency exchange futures. When you get a better exchange rate from your bank or credit card company than other places you are taking advantage of the FOREX futures markets.

These will be futures, not options right?

I think there will be both futures (Globex) and futures options (pit).

One last thing, Taxes are brutal for futures market gains. Short term gains (and most are) are taxed as ordinary income. Capital losses are a complex formula of this and that IRS mumbo jumbo, which you need to pay someone to do for you.

Huh? Aren't they 1256 contracts entitled to 60/40 treatment (60% taxed as long-term, 40% taxed as short-term regardless of actual time-frame, marked-to-market at year-end)?

Peter,

Yes, 60/40 treatment with positions treated as if closed on last day of tax year. There's all this stuff in my Hull book about exemptions from this rule (to get better trax treatment) that involve using futures as hedges. That was what I was referring to, as I assume most people want to use these to hedge rather than speculate.

newsfreak,

So t=30

You are betting what will happen in the next month?
So you have to change your position every month?

There are different contract lengths, but a lot are for 1 month. Depends upon the market. Some are much longer. The longer out, the less certainty you have about the future price, so the greater the potential difference from the spot price. You see this in oil all the time. Spot prices move by $1, but futures prices move by more than $1.

Your position in a futures market depends upon why you're there. Are you there to speculate for fun and profit or are you there to hedge something you own, produce, or purchase?

I think there will be both futures (Globex) and futures options (pit).

Hmmm, then we're back to the IV problem for the options market. I can't wait to see how this works out. Maybe they already have a bunch of HFs commitments, so they know they'll have both liquidity and volatility?

That was what I was referring to, as I assume most people want to use these to hedge rather than speculate.

Of course. :)

But I think it is a superior RE speculation vehicle, especially over short-term and if it really settles into backwardation. The lack of tax-deferral can be an issue though, but won't it be more attractive to foreign entities?

The lack of tax-deferral can be an issue though, but won’t it be more attractive to foreign entities?

That can be arranged ;) I'll have to renew that business license in Mauritius.

But I think it is a superior RE speculation vehicle, especially over short-term and if it really settles into backwardation.

I see where you're going with this now that I get that there will be futures-options. I'll start my blog thread on specific strategies later today and post the link here. We should set up a couple and track them for a month, then report how much we woulda made or lost.

Randy/Peter

Many "trading firms" are set up as either an LLC or Sub S to defer some of the tax issues. I think as long as they retain profits within the account they remain property of the entity. We would do well to form one.

Oh, Randy, you're right. We trade to mitigate risk, not generate short term gains.

newsfreak,

I know Lee Valley sells a pretty extensive set of sharpening implements, including for manual mowers.

As for the sheeples, I predict a future of ramen and PB&J.

Hmmm,

Can you do futures trading with your IRA and 401Ks? That would get rid of the tax problem altogether.

Soooo...what does the housing future mean for the market?

more liquidity? more scrutiny?

I can see the speculative angle, but who would want to long a housing future as a hedge? people who rent? people deferring a big buy?

Can you do futures trading with your IRA and 401Ks? That would get rid of the tax problem altogether.

It may be possible with IRA. I think eFutures has something like that.

NOT INVESTMENT ADVICE.

but who would want to long a housing future as a hedge

People who afraid of being priced out, aka sheeple.

I guess longs could be packaged for fixed income elderly with homes in non-prop 13 areas. Since property tax go up with property value, this would be a hedge for it.

My friend just gave up

Well, if he sees something that he likes and that he can afford, you cannot blame him.

Peter P,

Sorry. I can't say much about the actual investment and technical portion, so I'm trying think of how this product can be packaged for consumption.

I guess longs could be packaged for fixed income elderly with homes in non-prop 13 areas. Since property tax go up with property value, this would be a hedge for it.

Hedging can be very dangerous. What if prices go against your hedge? You will need cash to meet margin requirements.

Peter P,

But it would be part of an income generating portfolio for the elderly. The housing future would be a very small portion (only enough exposure to cover property tax costs)

But it would be part of an income generating portfolio for the elderly.

I don't know, it is more complicated than that. I have a feeling that more elderly people will lose their homes because of hedge losses.

Something makes me wonder if housing futures being placed up for investment means a desperate measure for the RE and builder's industry to prevent the enivitable.

astrid,

It kind of depends. If housing futures show promise within a short time of implementation somebody like Calamos in Chicago or Nuveen or Seligman will put together a "fund of funds" Exchange Traded Fund in no time at all! If they do you should be able to place those shares in your IRA. I own a few "option" ETF's and they haven't done that bad. About 8 to 9% without any effort but I wouldn't say they are NOT for the elderly. See that's another great plus we can attribute to "free mortgage money"! As rates were pinned to the floor many seniors (even well prepared seniors) HAD to find other means just to be able live off of their critical mass. Flushed out from behind the relative safety of muni bonds, CD's and money markets they had to buy MBS (and leveraged MBS at that) just to make ends meet. I've long since bailed on my REIT positions and I'm cleaning up the last of the MBS but people get used to those 8.75% pay outs.

nomadtoons2,

I think suprisingly Shiller ran into a number of regulatory hurdles before introducing them. I'll bet he was ready a year or so back but this is such a "sea change" and remember regulators know they are not the smartest guys in the room. Besides they get paid every two weeks regardless. It's kind of like showing up at a fire with a bucket of water and being told you need to show some ID.

astrid,

What I think I meant to say is that if you can a 100K + retirement income and do it with a 3% return, well then bully for you! If you have to chase 9% returns to have a 50K ret. inc. may I suggest watching your portfolio and Bloombergs with keen interest?

Our boomer elderly are pathetic.

Just a month ago, Barron's has a feature article for would-be retirees. The article talks about how a millionaire (someone with a million in investable liquid asset) can hardly retire. Why?

Because these "millionaires" want $100K AFTER-TAX income to support their lifestyle. So what's their lifestyle? They have a paid off home, and a vacation home NOT paid off (hello, shouldn't renting be an option?). They want frequent international travel on business classes, cruises (Crystal, not Carnival), expensive golf membership, etc.

After reading the article, I was like, gees, can't you morons get off your sense of entitlement? First of all, unless you are willing to take risks with commodities or emerging market stocks, you ain't gonna see 15% pre-tax return on only a million dollars, but you fat asses don't want to take any risk. Second, if you only have a million to retire, then scale back your freaking lifestyle, you don't need to travel internationally so much, certainly don't need to ride on business classes, and you can just join Princess cruise instead of crystal of you find carnival to be too cheap. How about going to municipal golf courses instead of paying $100K initiation at exclusive clubs?

The article pissed me off because it shows what kind of idiotic snob these "millionaires" are, they are not savvy enough to manage personal finance, if they are, they won't be setting unrealistic expectations about risk and return. They expect the world to bend over backwards to satisfy their "needs" which are all inflated and unsubstantiated. I feel sorry for the kids of these retirees, they most likely won't see a dime passed down from these relatively well-off parents while other parents with less means but a better perspective on life will have far more to pass down.

DinOR,

Thanks! I'm beginning to see how this market can come down to the regular Joes and Janes. It'll be interesting to see how this market holds up when the housing bubble comes down big time.

I think I'll sit this one out on the side lines. I don't have much in savings, other than a very small amount ($20K or so) in IRA and a locked in student loan. If the getting gets really good or interesting, I'll call my boyfriend in. He would actually know what you, Peter P, and Randy H are talking about. I'm just here for pricing info on the 400k Pound Sterling turnip.

Soliciting specific CME futures and options portfolio strategies (both speculation and hedging) on my blog here. (This Patrick.net thread is trackback, so comments there are tied here).

SFWoman,

That meadow sounds absolutely lovely! My boyfriend and I made it to Antelop Valley poppy reserve after last year's rains and it was gorgeous. I love the shimmery California hills of summer though, it looks very impressionistic, especially when there's a breeze moving the grasses.

Have you considered planting a marionberry (a kind of west coast blackberry) hedgerow? I had some wild ones in Oregon and they were absolutely delicious. They would make for a good wildlife habitat and are practically natives to Calistoga.

Owneroccupier,

Well, that's social Darwinism for you. Nobody will be there to pity these snobs when they are forced to subsist on $25K a year. At least this is one area where I don't worry about a taxpayer bailout :)

Would be a pity for their kids and grandkids though. Properly invested, $1M in a generation skipping trust would be a heck of a lot of money in 20 or 30 years.

DinOR,

The other thing about chasing a 9% yield or any degree of active management is to keep a good CPA and/or tax lawyer close by. The transactions will get complicated in a hurry.