patrick.net

...hmm..being an economics innumerate, can anyone explain to me why the DOW is a few points away from an all-time high?

And, pretty lady on CNBC is running thought the housing numbers in exactly the way described in the thread header...

I have a hunch that the Dow rise is partly driven by quarter-ending window dressing. Also, a lot of new money has probably been sloshing into the market due to smart money cashing out at the top of the RE bubble over the last year or so.

I bought S&P 500 puts on Monday. Maybe a little early, but I have a strong hunch the S&P will be down in the next 12 months. By this time next year, the market may have fully priced in the impact of the '07/'08 mortgage resets.

Further thoughts on the DJIA:

The market PE of 17 looks reasonable until you take into account the fact that corporate earnings are at record levels. Based on more normalized earnings, the PE would be around 30. Housing and consumer-led recession = lower corporate earnings, in my opinion.

I'm not so sure of the DOW - Housing causality. There's certainly some reflection, but a lot of what's propelled the DOW is the simple fact that corporate balance sheets are the strongest since anytime post WWII, companies are awash with cash, and US corporate dominance has grown at a record pace internationally.

Anyway, who cares about the DOW anyway? The S&P is still way off it's all-time highs.

I agree that there is a rising question about which fundamentals to use for valuation. No new paradigms, but the nature of valuation has changed in light of this unprecedented run of corporate blow-out earnings.

Mike,

The sooner we tune out that "noise" the better off we'll be. I tend to look at investing in even simpler terms (it's what you DON'T own) that makes all the difference!

Matt,

We've discussed the builder's accounting shell game previously (but not to this level of detail). Please feel free to expand on that.

We've also tried to gauge the impact of 'incentives' on overall prices as well as reporting requirements. Let's see....... at closing I'll get 40K cash back, a pre-paid lease on a BMW AND a vacation? Should any of this show up on a 1099? Should I declare any of this as income?

This is an interesting read. If corporate profits are mean-reverting, then we could be in for some serious stock market declines. (In my post I overstated the normalized S&P PE ratio--it is 25, not 30, according to this article):

http://www.hussmanfunds.com/wmc/wmc060807.htm

Why profits may revert to the mean (not entirely housing related):
1. Wage pressure from FBs / politicians
2. High energy prices hitting the economy with a 2 year lag, due to expiration of prior hedging activities
3. Increased competition for shrinking consumer spending dollars
4. Dollar decline and concomitant shrinkage of global labor arbitrage
5. Credit downgrades due to slowing economy, driving borrowing costs higher.

Matt and DinOR,

I read recently that some honest appraisers (yes, they exist) are combing sales contracts looking for incentives thrown into the sale, including upgrades, HOA fee payoffs, mtg points buydowns, etc and factoring them into assessed values for both ongoing sales and for comp assessments. Too bad this practice is not widely used; otherwise, these incentives would show up more significantly and rapidly in the numbers.

What I don't understand is why a buyer would accept upgrades over price reductions. I know, I know, price reductions may not be on the table (yet) for many transactions. But if one just calculates, say, $50k of upgrades vs. a $50k reduction in price and its associated reduction in mortgage, tax, etc. etc., it boggles the mind why people accept the upgrades.

There’s certainly some reflection, but a lot of what’s propelled the DOW is the simple fact that corporate balance sheets are the strongest since anytime post WWII, companies are awash with cash, and US corporate dominance has grown at a record pace internationally.

Hey, October is coming again. Stocks approaching all-time high going into October is not necessarily positive. Think 1929 and 1987.

I do not give a shit about corporate balanced sheets becase they have nothing to do with future stock prices.

"A friend of Patrick" posted this here a couple of threads ago. I think it is worth a re-post. The chart shows the NAHB index charted against the S&P 500 with a one year lag. The correlation over the last 12 years is fairly striking.

This chart, along with the historically high profit margins in the stock market and the possibility of a recession in '07 or '08, convinced me to buy S&P puts:

http://schwabinsights.com/2006_09/mktoutlook.html

Matt,

As a "former" buyer of MBS I've watched with some concern as builders dish out the goodies at an alarming rate! (Forgot to mention the inground swimming pool) and the "implications for mortgage collateral cover" should be disturbing to everyone in that arena.

I believe the value of these incentives has been soundly debunked by posters here but isn't it incredible? If say Morgan Stanley ran an ad that "enticed" investors with a free car and or cash to buy a 2001 portfolio at 2000's prices they would have broken about 19 different regs. In real estate I guess it's o.k.

Back ON thread, I'm not in the least bit concerned by this "spike" and as Randy amply describes the liklihood of this data surviving a revision is slim and none.

Moreover, stock prices drive fundamentals. When the stock market does crash, the balance sheets wll not look so pretty.

Punchbowl,
Sorry if you've been offended by the boomer rants. If you look several threads back, it is clear that the boomer-bashing applies to the "stereotypical boomer" who fits the bill of a financially irresponsible, ex-hippie, selfish blah blah blah. I doubt anyone on this board really applies these comments to everyone in that age group. At least I don't personally. Just look at the trashing of that "iaminforeclosure" 20-something dude.

I do think your story to be an exception to the American homebuying scene, not just the boomer scene. In the last 5 years, when's the last time you met someone else with that amount of financial discipline and level-headedness. Too bad more homebuyers haven't taken a lesson from people like you, though.

SFWoman Says:

I heard an interesting little report on restaurants this morning. Apparently Applebie’s is the largest eat-in restaurant chain in the US. Their customer numbers trend with gasoline prices. When gas prices go higher they lose customer numbers, and they lost 5-6% of their customers with the $3.00/gallon prices. Customers are starting to come back now, and their numbers are going up again.

And subsequently, visits to the cardiologist increase as well... "Would you like that mega-burger with some lipitor on the side?"

I bought S&P 500 puts on Monday. Maybe a little early, but I have a strong hunch the S&P will be down in the next 12 months.

Did you buy the Jan 2008 puts? Did you buy SPY ETF options or SPX index options.

I need to start investing again.

skibum,

My bad, forgot to factor in the HOA kickbacks, mtg. pt. buydowns and various other versions of "bag money". Lord only knows what's going on over at C/L and the FSBO arena! It is heartening though to see a few honest appraisers bringing this to light. About time.

The report said that a high percentage of Applebie’s customers drive SUVs, and the $80 to $100/month increase in gas costs made eating out difficult for many of them.

Higher end restaurants did not see a downturn in numbers during the gas spike.

Of course, $100 will not buy enough sushi for one person.

My evil side wants gas to become $8/gallon.

That story combined with the increase in credit card debt makes me think they should bring back home economics (with an actual stress on economics) in the schools.

With this textbook?

Home Economics: How to cook your books without a cookbook

"We moved there for a job opportunity that did not pan out"

You know SoCalMtgGuy would have an absolute field day with this. Also please to notice the date: March 2005. Heady times my friends. Kind of like March 2000. Such a sense of invincibility in the air.

I'm not sure if Punchbowl is the author or the observer so I'll tread lightly here. In truth, for generations these people would have been renters FIRST! Especially if you've never lived in FL before. It's not like taking a job w/the same company and transferring from from So. IL to So. IN! Vermont to New Hampshire, you get the idea. Now that sobriety has set in this whole demographic is "testing the waters" rather than diving in head first. As we should (regardless of our income). This whole segment of buyer is now absent from the market. Now that the fear of being priced out is long gone renting for 6 mos. or a year doesn't look so bad.

Did you buy the Jan 2008 puts? Did you buy SPY ETF options or SPX index options.

SPY ETF put options with a strike price of 124, expiring September '07--on the theory that the market looks ahead 6 mos. With all the mortgage resets, RE unemployment, etc., March '08 is going to look pretty bad by September '07, in my opinion.

Glen

In your opinion will a Gamma/Vega options bet beat risk-adjusted returns for bonds over that period?

On Topic:

The oft quoted media number: National: +4.1% increase in new home sales is a comparison of August *unadjusted* with the prior month *adjusted*.

The *unadjusted-to-unadjusted* comparison shows a -2.0% month-to-month trend.

Not that apples should be compared to apples or anything.

SQT: Was that bull run supposed to happen down the line when the "wave of retirements" starts, or sooner? If the "experts" are basing the size of the flow on current home prices... well....

In your opinion will a Gamma/Vega options bet beat risk-adjusted returns for bonds over that period?

Yes, definitely. Just about anything should beat risk-adjusted returns for bonds over that period. But mostly I just think the market is going to go down and I want a hedge. But as I mentioned in a previous thread, I am unsophisticated about these things and I just sort of trade by the seat of my pants. I am probably fooled by the randomness, but my results have been decent (way better than risk-adjusted returns for bonds).

In your opinion will a Gamma/Vega options bet beat risk-adjusted returns for bonds over that period?

Huh? I thought Glen is implementing a mostly-delta strategy.

I am probably fooled by the randomness, but my results have been decent (way better than risk-adjusted returns for bonds).

Have faith Glen. I lost faith and my investment (MM fund) sucks.

There is no such thing as randomness. God does not play dice with the cosmos.

Not investment advice.

SQT,

The market looks to be set for at least a short term rally but I doubt seriously boomers will have a lot to do with it either way. There was a really great article (and HARM linked several others that echoed the same sentiment) that the vaunted boomer wealth effect never really existed to begin with. In fact I believe the orig. source was the GAO.

Further, a poster at Ben's did a very effective job explaining why the "extended deadlines" for becoming one is faulty logic as well. Through the expanded guidelines men (born in the 1920's) would still have an insatiable and unprecedented "drive" to procreate well into their 40's! Yeah, right.

I've speculated that boomers broadened definition was done for political pull but when you look at it, the explanation is even more simple than that.

It was done to sell products. Plain and simple. Everything from Beatles albums to Chevy's and then some! Corp. America seized on this like never before and capitalized on this for all it was worth. When the original definition failed to suit their business model it was later expanded. It's just that boring.

Peter P,

My profound disagreements with you about the nature of randomness aside, I think Glen is implementing a primarily Gamma + Vega approach, because Delta should be reflected in the premium very efficiently over that long of a period. I tend to stay away from long-dated options for speculation, but as Glen said, they are effective for hedging.

My profound disagreements with you about the nature of randomness aside, I think Glen is implementing a primarily Gamma + Vega approach, because Delta should be reflected in the premium very efficiently over that long of a period.

In some sense, I agree with you. However, I think Glen is implementing this as a directional bet. He may not be trying to exploit the "mispricing" of the option premium.

I definitely agree that his options (being long-dated, OTM options) have more gamma/vega exposure than delta exposure.

I tend to stay away from long-dated options for speculation, but as Glen said, they are effective for hedging.

I agree too.

Well, VIX is quite low anyway.

http://finance.yahoo.com/q/bc?s=%5EVIX&t=my

Peter, Randy, Glen,

It might be helpful for those that don't walk, talk and sleep option trading if we described some of these terms? Even for those of us that are licensed a "refresher course" might be in order!

www.investopedia.com

Use the search function to look up gamma, delta and vega to get up to speed. I swear these options guys have their own language! My buddy used to trade the "butterflies" on the CBOE (Chicago Board of Options Exchange) and yes, he's a little "out there".

My buddy used to trade the “butterflies” on the CBOE (Chicago Board of Options Exchange) and yes, he’s a little “out there”.

I was interviewing someone (for a programming job) and the guy said that he traded butterflies in order to make time premium. I said I would rather go naked.

At that moment, my manager walked in.

Randy and Peter P:

You're both right. Partly the options are a hedge against my exposure to the market. Partly they are a directional bet. My best guess is that the market will be down significantly by this time next year. (As in S&P down to 1100 or lower.) But I acknowledge the strong possibility that I could be wrong.

If I'm right, then my stocks will probably get hammered, along with the rest of the market. But I'm not selling my underlying stocks because (a) I could be wrong and the market could rally; (b) If I'm wrong, I can take a tax deductible loss on the options (in my taxable account) and the rest of my portfolio should perform decently (in tax deferred accounts); and (c) I am hopeful that even if the market crashes, my stocks will hold up better than the market as a whole, since my portfolio is tilted toward low PE/PB/PCF value stocks.

I have nothing about butterflies. It is great if you pay next-to-nothing in commission.

But if you are charged a ticket-fee for each leg... it has at least 3 legs!

-about
+against

I am hopeful that even if the market crashes, my stocks will hold up better than the market as a whole, since my portfolio is tilted toward low PE/PB/PCF value stocks.

There are "style ETFs" that may better track your value-stocks portfolio:

http://finance.yahoo.com/etf/education/09

However, their options are not nearly as liquid as SPY.

not investment advice

"At that moment, my manager walked in"

Murphy's Law in action Peter! It's always the least trash talking guy in the office that gets busted and it's when you're not even looking for juicy gossip somebody drops a bombshell in your lap! I'm laughing with you, not at you!

Murphy’s Law in action Peter!

Another Murphy's Law: Murphy is an optimist.

Glen,

What you've shared basically describes my mindset over much of the last two years. The reason I take the pains to bother hedging is b/c housing is just such a wild card!

Had we not turned "flipping" into a cottage industry (along with lax lending facilitated by mort. brokers operating out of the trunk of their car) much of this would not be necessary.

Using your taxable account for your hedging options is just good business. I wish more people would look at it that way.

stop spending their money and start hoarding it for retirement

Stop spending? Perhaps in a mirror universe.

Boomers will spend their retirement now and go "huh?" later.