patrick.net

There are no options on those ETFs yet. The day ITB and XHB get options will be interesting, but it's a ways off. You could always write naked calls if you have the fortitude.

DinOR, his firm may have policy beyond SEC & NASD disclosure rules. I know guys who work in wealth management firms who can't do so much as reallocate their 401k without violating policy and risking termination.

This is why you all need to migrate to the dark side...you know, the "self regulated" side where the cut is higher and the personal risks are lower. I dare not utter those two ugly words in this company, though.

IMO there will be no place that is both ‘easy’ and ’safe’ place to invest for the better part of the next decade….except for puts on the house builders.

Ironically, I just bought long term calls on DHI this morning. The sentiment on wall street is overwhelmingly negative. Although I am as bearish as anyone on the housing bubble, I just don't see *all* of the homebuilders going bankrupt. DHI is the biggest builder and one of the most profitable. Currently selling for 4x earnings. Yes, the earnings will get slammed. Yes, there will be a lot of defaults. And yes, housing is cyclical. Still, 4x peak earnings is extraordinarily cheap unless you think DHI is going to go bankrupt.

I predict that there will be a lot of industry consolidation. The big, profitable builders (like DHI) will be in a good position to retrench and combine forces with other strong builders. The weak or overleveraged companies will get squashed and go out of business.

Eventually, DHI could very well be the WalMart of homebuilders. They will buy up the assets of their failed competitors and emerge stronger post-bubble. Right now, DHI has a $6.5 billion market cap. They could easily quadruple in size over the next ten years, housing bubble crash notwithstanding. They will use their size to obtain leverage over their suppliers. They will take advantage of the housing bust to retrench, buy back stock and scale down their operations. This is not Amazon at 100x earnings.

The builder stocks have already crashed because wall street has already "priced in" the bad news. The housing crash won't be nearly as hard on builders as the dotcom crash was on internet stocks, IMO.

*Not investment advice, of course.

Randy H,

You know, that may well be true. Many firms DO have policies in "place" it's just that I've so seldom seen them enforced? Wink, wink. To the degree that he can share what his position entails I can pretty much tell what you can and can't get away with.

Glen,

That may be true. It's gotten a lot tougher on smaller builders b/c of the expense of fighting zoning regs. etc. They just don't have deep enough pockets to play at that level. On the other hand, depending on litigation and other unforeseen factors there's no assurance all or any of these builders will survive. Just me, but I wouldn't even worry about 10 years from now. I made to Friday and for now, that's good enough.

I think without a crystal ball it's too early for me to look at homebuilders. I would mention that Pulte, Toll, and Lennar have similarly low PEs, and a quick search on the Fool pulls up articles suggesting PE is not a very useful indicator for these stocks.

TN: try debt collection firms.

Astrid: Israel is fighting a war on Hezbollah's terms, which is not a good thing for them. I doubt they'll have an easy win, so the likely outcome is occupation and a repeat of the last few decades. There's also no good reason for any other country to get involved, so I'm not expecting WWIII at the present time. People don't start wars for the fun of it though, so I'm wondering what other surprises are in store.

requiem,

A low PE (from recent highs) often indicates dismal outlook for future earnings. Some metal stocks have very low PEs right now. I bet the street is thinking a slowdown coming this way (hence lower demand for metals).

Historically, low PE stocks have done far better than high PE stocks.

The problem with such relationships is that, when they prove to actually be useful and predictive (even by a tiny amount), then they almost immediately become no longer useful or predictive anymore because "the cat's out of the bag". Isn't this why Fama & French had to modify CAPM. I believe that all these ratio-plays pretty much yield about random results at this point.

I just don’t see *all* of the homebuilders going bankrupt.

I think after the soft landing (in quicksand), there are going to be so many unoccupied houses that there won't be any need to build for years to come! That 70% ownership rate is just an illusion. We will all soon see what the TRUE ownership rate is.

The problem with such relationships is that, when they prove to actually be useful and predictive (even by a tiny amount), then they almost immediately become no longer useful or predictive anymore because “the cat’s out of the bag”.

This is why I "publicly" advocate the "market efficiency" theory. There is no point for everyone to search for the "holy grail", because if I find it I will deny it. :)

Real estate economist Gary Watts has revised his optimistic forecast for the Orange County housing market, telling an industry gathering this morning that he expects prices to go up 11 or 12 percent in 2006, and saying the gain could even be smaller.

Yeah, smaller like -11%. I don't see how a county can appreciate double digits and have massive foreclosures at the same time!

It’s pretty hard to know how much bad news is priced into the stock. I do not think enough has been, and they are setting up to be value traps for the Cramerites.

You will have to feel the sentiment of the market participants. I heard that a crytal ball may actually help clearing your mind. Anyone tried?

While I agree that stocks may mimic a "random walk" in the short run, I do not think it works so well over a longer time frame. If you have a sufficiently long time horizon, you can afford to wait until all the arbitrageurs have left the building.

If you have a sufficiently long time horizon, you can afford to wait until all the arbitrageurs have left the building.

In the long run, we are all dead.

UPINARMS says:

Gary Watts said that 15% “was in the bag”, now he thinks otherwise

According to the article:

Real estate economist Gary Watts has revised his optimistic forecast for the Orange County housing market, telling an industry gathering this morning that he expects prices to go up 11 or 12 percent in 2006, and saying the gain could even be smaller.

Yeah, smaller like -11%. I don’t see how a county can appreciate double digits and have massive foreclosures at the same time!

NOTE: You can take my other post out of moderation pergatory

When we debate soft landing or not, it is meaningless without defining what is soft v/s what is hard.

I have asked this before, without many replies. What is your definition of soft/hard landing ?

To me hard landing is 25% nominal decline from these values before or by end of 2008. I think it is a real possibility. I will use price per sqft. Currently DQ shows it to be $500 for resale homes in Santa Clara county. I expect it to be back to 400.

Anyone else willing to go out on a limb and put a number on their definition ?

The low PE trick doesn't work so well for Buy&hold long strategy unless on has a multidecadal time frame. Otherwise you have to do a long-short strategy to get anything out of it.

Regarding low PEs, I believe it's very much a per-stock and per-sector thing. For example, in a hot market for commodities, a low PE for a leading mining company may indicate a slowdown may come this way. But if the sector has been neglected for the past few years or decades, the low-PE stocks may have potentials.

http://biz.yahoo.com/special/luxury072006_article4.html

Efficient markets are old skool. Behavioral Finance has trod roughly over it.

I would support making the efficient market theory a mandatory course in all engineering, physics, math, and business schools.

Intelligent graduates should not have to "waste time" trying to beat the market. :)

I was discussing the entire stock market. The lowest 10% of all stocks by PE creams the highest 10%. Ignoring sectors.
What's the trading (sorry, harvest) time frame for this approach?

Could somebody tell us the gist of the theory?

I’d agree. Fischer Black’s essays on equilibrium are sublime.

I hope you know what I meant. ;)

MA,

I see. I was about to ask an academic question: Why hasn't the market caught up with this observation and eliminated or reduced the opportunity? The harvest timeframe is too long. I think that's the answer. Trading firms won't shuffle money quickly enough using this approach. Correct or wrong?

What about negative PEs? I love those -PE (gold) mining stocks.

That's right. For the same reason I wish there are more gay men.

Yes, baby!

Speaking of gay men, I find them quite reasonable. I saw pictures of the SF gay pride parade. It was eye opening to me. How come those gay men look more macho and better built than regular males?

I think I do. You want everyone to go on believing that you can’t beat the market, and so creating little niches for you to harvest, right? IT’S ALL ABOUT YOU!

Just want to see how the widely-held belief of efficiency can lead to inefficiency. It is kind of paradoxical. :)

Well, it is a zero sum game.

MA,

I think we're in agreement. I sorta make my living in this area as well, although from a different direction. I actively trade my own hedge strategy, probably about once per 4-6 weeks with not all turning over as well. I'm quite familiar with Fischer Black et al. I was referring to FFM as it applies to efficient market theory in contrast to old-school value-investing. I am value biased, having been schooled at the birthplace of such. I actually favor the Black-Litterman approach to portfolio optimization, which allows for quantification of behavioral factors and sentiment.

I have asked this before, without many replies. What is your definition of soft/hard landing ?

I have a more lax definition of soft vs. hard landing:

soft: flat prices with only real inflation adjusted declines
hard: decline in prices without taking inflation into account

I think this is reasonable especially given the expectation that prices never go down. In other words, a "hard" landing is already a done deal in many places (SD, Boston come to mind right now).

Ray W,
Yeah, that's a more blunt and colorful way of putting it!

MA, Randy and Peter P,

The discussion about EMH is quite interesting (and a bit confusing to me). Still I have a question from my viewpoint as average Joe. I do not understand all this, I do not have time to master it and in general "active" portfolio management is quite impractical.

In such a scenario, I have not found anything as peaceful as investing in market index funds on auto-pilot - every month a fix amount in say SP500. I have no ambition to "beat the market", whatever definition of that is. I just want to beat inflation. So I try to stick to my asset allocation, periodically making sure it is on/near target.

Is there anything for lesser mortals like us to learn/apply from the debates about EMH ?

New term to describe the housing bubble future?

How about, "I wonder if my Starbuck barista job is available"?

regarding the "Google factor" there is no google factor. Google employs how many people, how many are in the BA, ~4-5K, of these I bet that ~500 or so are making bank. Besides, what's the population of the BA 3-4 Million?

Oh wait, applying HaHaian logic it all becomes clear. Certainly 500 people making really good money justifies high home prices in Crapatino.

Sorry for wasting your time.

Call it a, "Precipitous Downturn".

It's a bubble surrounded by a balloon inside a Zeppelin filled with hydrogen gas.

Oh, the humanity!

Here's my term: "Lubricant-free ass-pounding"

Ok, so when exactly did Randy H transmogrify into Face Reality? :-)

Randy, Randy, Randy... Have you completely lost your faith in reality-based economics? Has the incredible breadth and tenacity of the bubble destroyed your capacity to even IMAGINE the incredible sea-change in market psychology that's taking place before your very eyes? C'mon, dude, if LAY can publicly acknowledge the inevitable, why can't you of all people?

Biggest asset bubble in human history? No, of course not. Biggest in our lifetimes? Could be. Something like $3 Trillion was destroyed by the Dot.com crash, and housing has accumulated approx. $5 Trillion in new "value" since then (and $4 Trillion in new mortgage debt). And --as others have already pointed out-- housing is much more broadly owned & traded as a percentage by the general public than tech stocks, so the effects are more broadly felt. Even if it only gives up about half of those gains (conservative correction), Dot.condo should at least equal the Dot.com bust in terms of wealth destruction and macro-economic impact.

End of the world? Hardly. End of greed & fantasy-based pricing and ultra-loose lending? Let's hope so. I can see no realistic correction scenario that does not involve housing in bubble markets giving up a significant chunk of value in nominal terms --unless there is rapid, sustained wage inflation (to support non-RE price & rent inflation). Outside of the top 5-10% of earners, there's little evidence to support this scenario so far. Of course, if it happens, I can't say I'll be that upset. Who wouldn't mind housing becoming affordable again by staying relatively flat, while your salary goes up 200%?

Oh, and btw I thought LTCM, Dot.com & the current mess had finally put the EMH (Efficient Market Hypothesis) to rest for good. If anyone can figure out a way to accurately predict and "price in" greed, fear, euphoria, herd behavior & collective madness, I'll bet there's a Nobel Prize for Economic waiting for you.

This is SO weird. And this is probably how RE market works.

At the begining of this year, I started visiting open houses and picking up flyers. So I decided to check on two listings that were near each other in the highly sought after Kennedy - Monta Vista school district of Cupertino.

21765 Hyannisport Dr, 95014. Sales history from Zillow
3/31/94 529K
3/28/06 1.275M

The asking price was 1.5M. So good 200K+ shaved off the asking price.

21796 Hyannisport Dr, 95014. Zillow says,
6/31/99 735K
6/21/01 855K
3/9/06 1.3M

Sold around the same time. Asking price was 1.2M. So buyer paid 100K OVER asking.

So one listing goes 200K under, other goes 100K over. Now here is the amazing thing. The one that got sold for less has at least 200sqft more area, and whole 3500sqft more plot !! Both were built in 1968.

So what gives ? In Cupertino around March/April bubble was still alive and bursting at the same time. I guess it depends on who has what information. Also, the one that sold for less, has HUGE gains even after selling for 200K less. Remember DinOR's theory ? Bargain with a guy with biggest gains, not with an FB.

hmmm, very interesting, SP.

although there is a big Lebanese community in Australia, including quite a few politicians and other dignitaries, I suspect the Oz govt will quietly go along with the US-Israeli agenda while making reasonable efforts to get Lebanese-Australian nationals out as required. expect more rhetoric about 'terrorists' etc.

I just picked up a flyer about East Timor at random in the uni library, and it points out that othe Oz govt criticised the then-current govt in East Timor recently mainly because it is in Oz's power interests to do so. In particular, they have been after a rich vein of oil and gas in a trench in the East Timor Sea, which, under international border law, belongs to the East Timorese, but under an agreement with the invading Indonesians some time ago, went to Australia. In other words, Australia permitted Indonesia to invade in the first place in the understanding that they would get the resources cheaply for not objecting. The latest agreement is for Australia to retain rights for 2 generations, by which time the resources will be played out, an agreement the govt in Dili wasn't too happy about. The Oz govt didn't want to see a leftist Timorese-Chinese nexus opening up and a sea change occurring, so chose to support the 'rebel soldiers' as having legitimate grievances, rather than choosing to brand them as 'terrorists acting against a legitimate govt in a fledgling independent nation' etc. Choose the rhetoric to suit the situation...

It's a dictum of foreign policy that there are no permanent allies or alliances, only permanent interests...

http://www.wsws.org