patrick.net

I agree - when people look like they want to puke when you mention real estate - you are getting close to the bottom. Not until then

Yes. I think the market is discounting a growth slowdown or slight decline in the sub-prime lending business.

Looking at the steady decline of FNM, do you think mutual funds are slowing unloading it ahead of the restatement?

And since you own puts in that train wreck, you must be a happy camper

I have a tiny position. Looking to increase exposure though. Deep in-the-money puts are pretty good for shorting. For around $720, you can buy a 55 Jan 06 Put (100 shares) with very little time decay. Even if the stock stays at the current price level (48.26) the option will still worth about $670 at expiration.

(Not investment advice.)

Pretty good deal. Peter. Less of a premium for an option with that much time remaining then I would have thought.

A 50 Put with the same expiration will cost around $3.5 per share. Deeper in-the-money options carry less time premium.

Most people buy very cheap out-the-money option and they usually get what thay pay for - nothing. :)

---Sillicon Valley ranks last in quality of life among major U.S. high-tech regions

The authors of this report would have done better to have bothered to do some preliminary research and read Easterly and King & King before making generalizing assumptions. Some geographic areas achieve virtuosity loops which are difficult, if not impossible, to synthetically replicate; conversely some areas become poverty traps. Regardless, if you compare absolute numbers (firms incorporated, licensed professionals, median education levels, etc.), you'll see why the BA is so far askew.

Again, I'm not trying to debunk justified bearishness on the BA RE market, just keep things in reality-check. This isn't going to be the end of the world as we know it, just a pretty big correction.

Again, I’m not trying to debunk justified bearishness on the BA RE market, just keep things in reality-check. This isn’t going to be the end of the world as we know it, just a pretty big correction.

Most here are looking for a sane housing market, not a collapse of the economy. I would hate to see the doomsday scenario occur because no one would benefit and most of us could end up really hurting.

That said. I'm going to have a hard time feeling sorry for all the smug RE and mortgage brokers who've been in our faces for the last few years boasting about their brilliance and foresight when they get smacked in the face by reality.

Sillicon Valley ranks last in quality of life among major U.S. high-tech regions

But Silly Valley ranks first in silliness!

Most here are looking for a sane housing market, not a collapse of the economy.

Of course. If the financial system collapses there will be no way to profit from the bubble bust or to preserve the profit. ;)

It is not the end of the world. We can resort to cannibalism if everything else fails.

SQT, you’re so eloquent even when dishing out those harsh verbal assaults!

Journalism! ;)

By the way...the end of the "bond ticker" excerpt I quoted...it mentions disappointing #'s from UofM consumer confidence...maybe it's me, but I didn't see any headlines about this...*almost* conspicuously absent...? I know I often see headlines about that metric when it comes out...maybe I just wasn't browsing enough today. (shrugs).

---I know I often see headlines about that metric when it comes out…maybe I just wasn’t browsing enough today. (shrugs).

It was on the front page of the FT. Maybe the WSJ just was too busy figuring out who's going to jail next.

It was on the front page of the FT. Maybe the WSJ just was too busy figuring out who’s going to jail next.

I love FT. When you can have pink newspaper, why settle for anything else.

Ahhh...thanks for clearing my conspiracy delusions...not reading any financial pubs here. Just casually browse generic websites for headlines (yahoo finace, marketwatch).

SQT, you’re so eloquent even when dishing out those harsh verbal assaults!

Awww shucks..
Really I'm just trying to soften the cattiness.... a little. ;)

Housing market is a bit different from the stock market. BA is in fact made up of many micro-markets. In the last housing recession of the early 90s, some small West Valley communities actually went UP slightly (around 5%) when some East Bay communities dropped as much as 35%. Therefore, although I am bearish on BA as a whole, I do think some areas will hold up exceptionally well because everyone with means would want to move in regardless of good or bad times. It is the marginal areas that will suffer the most.

That being said, my biggest fear is exactly what Randy H pointed out, inflation, not hyperinflation, or deflation (which would have awesome for me), but inflation running around 8-15% a year. This seems more and more likely as the bubble inflates because this is the path of least resistance and minimal damage to the entire economy if Fed can help it. The government/s of the world are all aligned in their interests of assuring a soft landing of the US realty market, because if we vanish, many other countries will perish, at least in the short term.

Now my question to Randy H is, how fast do you think that USD will go down to help ease the soft landing, or does the USD need to go down at all? It is obvious to me that we will print lots of greenbacks to ensure a soft landing, I am just not sure how the other currencies will react to this, since as of now, if the market correctly reflects the USD value, we should have been at least another 50% down already.

---Now my question to Randy H is, how fast do you think that USD will go down to help ease the soft landing, or does the USD need to go down at all?

I'm not a FOREX expert by any measure; I only know macro stuff and currency hedging. My best guess is that the USD needs to fall signficantly vis-a-vis the EUR and JPY, but with some caveats. First, the USD is still the global reserve currency. They EUR has made inroads, but because of the failure of the EU Constitution and persistent fiscal/monetary misalignment in EU member states, the EUR may not be able to displace the still safer USD as a reserve. Secondly, US current account deficits and trade deficits put downward pressure on the USD, *but* there is a very good argument that as the CNY (China) liberalizes the USD/CNY rate will rise over the long-term. This forecast is based upon estimates of restricted capital flows within China. Something like this: Once China has a more convertible currency (one not managed by the Chinese Central Bank, and restricted in conversion) there will be significant capital outflows from China because investments can earn far better risk-adjusted real rates of return elsewhere.

As to deflation being "awesome" for you...be careful what you wish for. Deflation is generally not good for anyone except far-left and far-right agitators.

*correction*
The USD/CNY rate will _FALL_ over the long term. (Less dollars to buy a Yuan)

although I am bearish on BA as a whole, I do think some areas will hold up exceptionally well because everyone with means would want to move in regardless of good or bad times. It is the marginal areas that will suffer the most.

Perhaps, even for "people with means", it will still be a question of value. And, to the degree prices there are driven by speculation, there's long-term instability.
As a real example, I don't see many homes my local "prime" areas selling, such as Belvedere, Ross, etc. These homes are priced between $2-4M, and they've been sitting for up to six months. Btw, a lot of people with borderline incomes overleverage themselves just to live in "status" areas, so there's instability from that too.

As to deflation being “awesome” for you…be careful what you wish for. Deflation is generally not good for anyone except far-left and far-right agitators.

See, opportunities still!

Randy, do not look at China as a free market economy. It will *always* be controlled by the government and personally I think they have no interest in *capitalism* at all. I believe they are leveraging a market-economy to implement their version of socialism.

Randy, thanks for your input. I will never buy CNY as a hedge because China is too dependent on us as a buying market, if we fall, the first country to perish will not be us, but them. Also, I believe that China has a lot of structural problems it needs to resolve if it were to repeat Japan's success, which I highly doubt. CNN reported the other day that the most fertile part of China, Southern China, where most of the GDP is generated, has only enough water to sustain its population for another 40 years. China's per capita potable water is 1/3 of world's average, among other catastrophic environmental problems. I will never bet on a country which has a survival issue.

The problem for us the bears as a whole is, where to park our money? Since we have been acting responsibly with our hard-earned cash, I'd hate to see us not taking advantage of the bubble burst as much as we can. The nightmare situation for us is to see a domestic inflation which will sustain the current home price at the nominal value, so if we hold USD, we don't really gain anything by choosing not to participate in the fool's game. It is also beyond my imagination how we can print more money without USD depreciation. So for me, the best way for us cash-rich investors to take advantage of the situation is to hold a basket of foreign currencies or commodities so when USD does go down quite drastically, we shall benefit from exchanging our fx back into USD to buy homes at USD-denominated price. The question is, how far will USD fall?

Btw, are you guys aware that there are already some bear funds out there that are betting against mortgage companies (some of which are down 3%-5%)? If you truely believe in what you say here, might as well put your money where you mouth is.

The reason why I won't buy CNY is because I lived in China as an expat and still have lots of contacts there, so I know that place inside out. The financial sector of that country is completely rotten. It is a place to make quick bucks, that's about it, but remember to take your money and run. The long-term prospect of China is very much in doubt. Plus, how do I take profit on a non-convertible currency? I have quite a few very rich Chinese friends who share the same opinion, they all have businesses in China, but left their families and most of their fotunes outside of that country. That in itself says a lot.

The answer is, gold. Gold is the only thing that cannot increase in supply easily and everybody hoards when currency system is in turmoil. Just look at what happened to gold price in 1980s, today's gold spot still has a long way to go.

Also, China is no Japan, it won't be Japan for a long time. Japan is technologically much more advanced than China when it was in the comparable period of 1970s. The contemporary Chinese who were born in the late 1970s and early 80s save as little as the Americans, how do you think one can afford a car in China? Car loans. Do you know what the latest default rate on car loans in China is? 10x the American default rate. That is a country that looks good today but will disappear the moment their main backer, America, runs into problems. The way to hedge against the fall of USD is to find a country / countries with the least economic ties with us, namely, the Europeans, Scandinavians or even the Russians. The entire Asian economy is dependent on us, so I won't hedge against a free fall of USD with any Asian currencies as a general principal.

Investment IS about psychology. Why does one need to spend a MILLION to live in a squatter hut in BA? That is about psychology. Why does one need to pay hundreds of P/E for GOOG? Again, psychology.

The root of the problem is, there is way too much USD floating around. When there is too much paper in circulation, there will be inflation. But China's cheap labor and export-oriented policy has ensured that we don't get inflation in goods that can be imported or services that can be outsourced. However, whatever paper USD is left unconsumed will have to start chasing items/assets that cannot be outsourced, and commodities that cannot be increased in quantity as fast, namely, homes, medical service, education expense, food, commodities and precious metals. It is a simple economic phenomenan of lots of SOMETHING chasing limited quantity of SOMETHING. The price of whichever in scarce quantity will go up, and that of whichever in abundant quantity shall go down.

What is the value of USD? It is just paper that is backed by "in God we trust", or shall I say, in AG we trust? Economics is a study of relative scarcity and group psychology.

That is about psychology. Why does one need to pay hundreds of P/E for GOOG? Again, psychology.

Yes, greed is GOOG.

No, I am not suggesting that we will ever go back to gold standard, that is quite impractical. However, in this era of irresponsible money printing, people will start to increase the % of gold in their portfolio. Before we jumped on this bandwagon of free money, I had 0% in gold in my porfolio. Now I have 14%, and still plan to increase to about 25%. Same thing is happening to other friends of mine who are thinking of hedging against the free fall of USD because it is long overdue.

I am sure lots of new gold bugs were lately manufactured because of this Katrina rebuilding effort + no tax raise nonsense. You just can't turn on the printer 24x7 expecting everything to stay constant. Sooner or later, USD will be worth less than the paper that the denomination is printed on.