The malaise that's infected the housing market has found a new host -- the credit market. They're calling it "a lack of liquidity," but it's really just people putting off as long as possible the inevitable -- selling to the bidders. In Florida over the past six months, you could have sold your home if you had been willing to hit the bid. No longer. Like the junk-bond market this week, the bids have been pulled.
Today's rally in the financials appears unsustainable. Hard to believe that UBS analyst would upgrade Merrill Lynch. There are too many unknowns still out on the table to make that call. Unlike the debt and housing markets, there is plenty of liquidity in the stock market. Probably because they're trading stocks with other people's money. But we still think there will be plenty of spillover from the complete shutdown in the housing industry.
Colleagues have told us that the levels of fraud committed during the housing bubble are unimaginable, and will dwarf the long-forgotten savings-and-loan scandal. Last year, one-third of US mortgages were interest-only or payment-option ARM. Four years ago, these choices barely existed. You can only imagine the lies that were told, on both sides, to get people who weren't qualified into homes they couldn't afford. And now, with lending and credit standards being tightened, there is no one to sell these homes to except the bank.
We think there's more downside to come this month. Hold onto your puts.
Monday, August 6, 2007
2007 -- So Far, So Good
It's been a good trading year for us so far. We caught the market peak in January and got out, then we jumped back in again after March. We got good and scared again heading into July, and now we're waiting for the perfect opportunity to get back in. We could buy now and profit this year, but we think the true Blue Light Specials haven't shown up just yet.
Overall this year, we've been buying the oils and selling the homebuilders. Our broker/dealer indicator has provided us with a couple of nice trading opportunities, and our bond indicators have kept us ahead of any major swings in the credit markets. You can't have a good opinion about where the market is headed next unless you have a good bond indicator, and ours is one of the best. We've also profited from trading the golds, one of the most volatile sectors around. Now we're looking at the biggest opportunity of the year, and we didn't have to suffer any losses on the way to the experience.
More specifically: We sold the broker/dealers in late Jan, then bought them back in mid-March for an 8% gain. We also went long at that point -- "Zone 1 for XBD" was the headline -- and carried our position until early June, we we said "We'd get out now." We took in 14% on that long trade. Turning short at the same time, we're up about 20% now. Soon we'll look to turn around again and go long the brokers. So far this year, we've made accumulated gains of about 42% on our broker/dealer recommendations.
Along with the broker/dealers. we look to the bond market to tell us where the stock market is headed. It's pretty simple: Yield indexes are liable to peak about the same time as the broker/dealers. The broker/dealer stocks just don't like strong bonds. Once the bonds peak again, the broker/dealers (and the yield indexes) will be free to rise again. That will start the rally that should take us through the end of the year.
Yields peaked in late January, then they bottomed in mid-March. Yields peaked again in late May, and here we are now. The market likes strong yields, but yields are still falling. When they turn, so will the market.
Economically, we're long the oils and short the homebuilders right now. That means we'll buy the oil when they get weak, but we won't short them when they get strong. And we'll short the homebuilders when they get strong, but we won't go long the builders when they're weak. (Although we might take one more stab at going long the builders soon, then get out earlier than usual.)
The long oil position has proved extremely profitable. The oil service stocks gained about 50% during their run from late January to late May. The big oils gained nearly 30% over that span. We got out after the market as a whole had turned down, but the oils were still going strong. Now we're looking at another wonderful opportunity, and we're just waiting to make the call.
We've done pretty well shorting the homebuilders, too. We made around 10% from January to April. But our current trade, which we're looking to close out soon, has the homebuilders down by 25% this time. Might be time to take our profits and run. Might even go long the homebuilders because the market is so wiped out, those guys will probably have a nice relief rally.
Finally, we'd had nice success trading the golds. We made five buy recommendations, and only one sell. All five buys were in the same range, and we were never down by any significant amount. Gold stocks are terribly range bound, but there is so much interest in them that the range is gigantic. We can make profitable trades by buying anytime the stocks hit the bottom range and selling anytime the stocks hit the top range. So we'll keep adding to our positions each time the bottom is made, then sell them all out when we get that significant top
The significant top came on July 23, when we said that the gold stocks -- which had rallied -- were liable to pull back with the rest of the market. Gone are the days when gold stocks moved as a counterpoint to the rest of the market. Nowadays, gold stocks trade with the market more than they trade against it.
Overall this year, we've been buying the oils and selling the homebuilders. Our broker/dealer indicator has provided us with a couple of nice trading opportunities, and our bond indicators have kept us ahead of any major swings in the credit markets. You can't have a good opinion about where the market is headed next unless you have a good bond indicator, and ours is one of the best. We've also profited from trading the golds, one of the most volatile sectors around. Now we're looking at the biggest opportunity of the year, and we didn't have to suffer any losses on the way to the experience.
More specifically: We sold the broker/dealers in late Jan, then bought them back in mid-March for an 8% gain. We also went long at that point -- "Zone 1 for XBD" was the headline -- and carried our position until early June, we we said "We'd get out now." We took in 14% on that long trade. Turning short at the same time, we're up about 20% now. Soon we'll look to turn around again and go long the brokers. So far this year, we've made accumulated gains of about 42% on our broker/dealer recommendations.
Along with the broker/dealers. we look to the bond market to tell us where the stock market is headed. It's pretty simple: Yield indexes are liable to peak about the same time as the broker/dealers. The broker/dealer stocks just don't like strong bonds. Once the bonds peak again, the broker/dealers (and the yield indexes) will be free to rise again. That will start the rally that should take us through the end of the year.
Yields peaked in late January, then they bottomed in mid-March. Yields peaked again in late May, and here we are now. The market likes strong yields, but yields are still falling. When they turn, so will the market.
Economically, we're long the oils and short the homebuilders right now. That means we'll buy the oil when they get weak, but we won't short them when they get strong. And we'll short the homebuilders when they get strong, but we won't go long the builders when they're weak. (Although we might take one more stab at going long the builders soon, then get out earlier than usual.)
The long oil position has proved extremely profitable. The oil service stocks gained about 50% during their run from late January to late May. The big oils gained nearly 30% over that span. We got out after the market as a whole had turned down, but the oils were still going strong. Now we're looking at another wonderful opportunity, and we're just waiting to make the call.
We've done pretty well shorting the homebuilders, too. We made around 10% from January to April. But our current trade, which we're looking to close out soon, has the homebuilders down by 25% this time. Might be time to take our profits and run. Might even go long the homebuilders because the market is so wiped out, those guys will probably have a nice relief rally.
Finally, we'd had nice success trading the golds. We made five buy recommendations, and only one sell. All five buys were in the same range, and we were never down by any significant amount. Gold stocks are terribly range bound, but there is so much interest in them that the range is gigantic. We can make profitable trades by buying anytime the stocks hit the bottom range and selling anytime the stocks hit the top range. So we'll keep adding to our positions each time the bottom is made, then sell them all out when we get that significant top
The significant top came on July 23, when we said that the gold stocks -- which had rallied -- were liable to pull back with the rest of the market. Gone are the days when gold stocks moved as a counterpoint to the rest of the market. Nowadays, gold stocks trade with the market more than they trade against it.
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