San Diego Housing Bubble News and Analysis

This is a "sophisticated" trade? The short percentage of the float was 41.6% a/o May 10th.

Here we have a local (San Diego)company (how cute, convenient, and lazy) with nearly 50% of the shares available to purchase, already sold short.

Pigs get slaughtered...so do sheople.

I would encourage the readers here to be very careful about following anyone's strategies (mine included, as this trade could work out wonderfully well..who knows?) especially those who claim to be "sophisticated investors" and then throw out a strategy any simplot could have picked(and has...41.6% short ALREADY) on his/her own:

Let's see...company does only sub-prime lending..lots of ARM resets ahead..think I'll throw my dart at this one.

If it seems too easy..it is. Remember, there are a LOT of institutions out there who monitor stocks like this every second of every day. Be prepared to lose your ASS going short. Look into buying options if you are that bearish (your downside risk/loss exposure is limited) instead.

Be careful out there.

Perhaps someone could point in the direction of some good online tutorials on practical techniques for investing on a falling value and the risks associated with each method? This would be quite beneficial for those of us who are currently rather unsophisticated in our investing but would like to improve.

Thanks in advance ;)

LEND may be a good short, but right now is a little too early for adding more to this in my opinion. And as another responder mentioned, the short interest is very high on this one.

I am looking at NEW for a future short prospect. NEW is another sub-prime lender and has been very resilient to the bad real estate news. It also has a much smaller short interest. Once it starts trending down (wait for it to drop below 50day moving average) I think it will be a good short play because it has a long way to drop.

But if you really want to take advantage of the real estate crash, the obvious play right now is to short home builder stocks. They have been clearly in a downtrend for some time and they still have a LONG, LONG way to fall. There is also a new homebuilder ETF that you can short called XHB, seems to be tracking the homebuilder index.

What we really ought to do is form an investment club of our own...for FUN (first) and PROFIT (second). I've got ties from my old days as a Wall Street financial consultant to a full-service broker (friend) who discounts my trades to chump change.

Anyone interested in forming an investment club? We could go small $$ ($500 to $1000 per club member) and all get together wearing our Mr. Housing Bubble T-shirts once a month/quarter.

Just a thought. I use to work with a couple of investment clubs and they were mostly social clubs. We'll not get wealthy doing this but it could be fun.

I'm in. I'd love to meet some of the people on this forum!

Hey bubble dude, you jealous for attention or something?

You criticize my idea but offer NOTHING of your own. In my opinion, that is the definition of a loser and probably explains why you aren't wealthy yourself. Most people who are not wealthy criticize those who are because it makes them feel better. I advise you to get over it.

I have given a real time idea that everyone will be able to follow and see how it plays out, what have you shared with this forum, but a bunch of the same useless re-hashed drivel?

Obviously, my frustration with the whole housing bubble is that its a very crowded trade. Both smart money and dumb money are on the same side, which makes the outcome often different then one might expect.

Also, a quick lesson for you, sophisticated doesn't mean complex. Warren Buffett made his wealth with very simple trades that any "simplot" could have seen at the time.

Finally, as you obviously are ignorant in your historical knowledge of the stock market, the vast majority of stocks with large short-interest end up with major declines. There are a few that do qet squeezed and they make all the headlines and create fear amongst the retail investor (aka, the dumb money.)

Is that a valid risk for LEND? Certainly, I'm not blind to the risks, but I will hedge any upward momentum with short term calls. LEND is a very liquid stock and unless they display some operating momentum, in my opinion, a squeeze is unlikely.

Instead of bashing me, why don't you go see if you can contribute something of value.

HAHAHAHA...Your "old days" as a Wall Street financial consultant seem to have paid off handsomely....Really, you think $500 would be enough to get started? Wow, that's some big bucks there kiddo.

If we get several participants (many of whom are in their twenties and probably not flush with thousands of dollars) we could start up with very little capital.

RightSide-you are certainly welcome to join in (assuming you can get enough people to toss coins into your roadside cup to meet our minimum funding standards).

Good luck with that trade (paper?) in LEND!!

That sounds like some fun. Let me know if you decide to do this - I'll pay to play.

I'd join.

Honestly, your club idea sounds like a tactic perverts use to pick up little boys on the internet. I'm staying the hell away from you.

Perhaps we could do some brainstorming about how best to arrange a meeting so that we don't get menaced by those who would love for me to shut up.

I'm actually a pretty nice guy.

I've shaken the cage of RightSide because many weeks ago he referred to himself as a "sophisticated investor" in the "Bressi Ranch 25% off" post and ignored repeated requests from others to identify what makes him a "sophisticated investor". Additionally, the smugness in THIS VERY FORUM (which he created) up top..."Watch and learn" I believe he said, had me calling BS! Again... most who refer to themselves as "sophisticated investors" are anything but.

Now..on to an investment club (or social club)...

You've pissed me off because you bash me for no reason...I could care less what you think of me, but I'd like to share ideas and I'm open to critiques.

But you just offer insults with no substance.

Start a fight with me, I'm going to fight back, online or off.

Alright, I apologize RightSide....I am being unfair. I have been thinking of going short (with options) myself in LEND, too. I sincerely hope that it does work out for you.

I have said some stupid things myself in forums, probably due to my own frustrations with the confusion of having both smart and dumb money in the market.

Last thing I need is an enemy, so please accept my sincerest apologies if I have ever offended anyone.

I do believe that I shall have no more need to post in these forums for quite a long time.

saiine offered up his brother in laws restaurant in Cardiff/Solana beach... that's a pretty central location and would allow some people from North County (like me) to make it.. The food is also really good there.

RightSide, your posts sounds as thought you're vindictively contrarian.. but this board is pretty much a place where alot of contrarian investor and real estate shorts like to hang out so I doubt you'll get much of a fight..

RightSide needs this LEND trade to work out, to counteract for the $500K he's going to lose on the purchase of his $1 million home.

Offhand I'd say this would be a good time to go to our respective corners and not come back out until we have something of substance to add.

Your apology is accepted bubble, thank you.

To address Rich's question, why short LEND now and why do I think the lenders have escaped the first downturn that homebuilders have suffered so far...

First off, I think the homebuilders have large liabiliites on their balance sheets that are difficult to offload. Even though they've learned from the downturn lastime not to have a lot of housing inventory on hand, they do carry a lot of land and land options on their books that is not liquid and I think will ultimately cause a few of them to go BK.

The lenders on the other hand, including LEND are able to quickly and efficiently package up all their sub-prime loans and off-load them as Mortgage Backed Securities. If LEND had to carry all the loans it made, it would be sunk no question in my mind. IMO this has enabled the lenders to hold up here right now...Ultimately though, with sales dropping like they are, I just don't see how the lenders are going to keep their business. Where will the loan volume come from?

Here are the facts now:
-Housing sales continue to stall across the nation
-The fed is entering late stages of its tightening cycle.
-Home inventories are skyrocketing
-With declining home equity, the opportunity to squeeze more golden eggs out of the goose is fast coming to an end.

And the biggest timing issue:

-We have about 15 days left in Spring. That means spring has come and there was no spring rally. It seems to me that we are on the verge of negative yoy comps and I think that is going to mark the change in the longer term trend.

...I think the lenders are next in line to see their business killed and I see the potential setup for a really ugly fall this year. I want to be positioned before that happens as I do believe the market is forward looking and now feels like the right time to start my positioning.

Ultimatly, I want to be heavily short lenders, home insurance providers and highly leveraged homebuilders without the capital to withstand a drought.

Personally, I think that there is going to probably be an extrogenous event that causes a nationwide recession and results in a severe downturn in the real estate part of our economy. Everyone looks at the last San Diego bust and says well that was caused by the loss of jobs in the defense industry...yet that really only became apparent after the fact. I looked back over past newspaper clippings and never once did I see a single article talking about how the loss of jobs in defense was going to undue the housing market in southern california.

I think the cause of the next decline will also probably be only apparent after the fact as well, therefore, I think you want to try to position yourself before that happens.

It took me a long time to pull the trigger, but I think the peices are finally starting to come together.

Any thoughts contrary to the above points are more then welcome.

I think an investment club would be interesting. I went short last week for the first time. I'm short two homebuilders and a lender.

Chris Johnston

Thanks for going out there and throwing out a trade you are in live. I do it everyday in my business, and always get comments. So kudos to you.

LEND has very low debt ratios, very strong earnings trend the last couple of years. Also, the seasonal trend has been for a rally into the end of the year on this stock from here. These in general would be reasons to buy a pullback. The price/sales ratios is 1.91 which is not as high as I would like for a short, but iteast over 1. Forward p/e is 5.57, very low. This is typical for oil companies and home stocks.

In general most of those reasons, except price/sales ratio ( under 1.0 is best for longs) would be reasons to buy this stock on a pullback.

Most of us are very bearish on RE overall, so maybe that trend makes this trade work. But, in general, it does not meet my parameters for a short. I would prefer a p/sales ratio of 5 or so, higher debt, and dropping earnings. Then a rally against the downtrend in price as a short entry point. Maybe this stock will set up that way in the future.

Good luck right side - I will always pull for someone who has the nerve to throw something like that out there. However, this is not a trade for me based on what I stated above.

I tried to get some feedback for you, since I don't know the first thing about shorting. I asked Bill Fleckenstein, and will report back tomorrow if he answer the question about shorting LEND.

This is what Fleck had to say in today's column about shorting.

BILL;

'NEW'S STOCK SEEMS VULNERABLE GIVEN THE REAL ESTATE STOCKS DECLINE. DO YOU SEE THIS AS A GOOD SHORT CANDIDATE? I SEEM TO RECALL YOU WERE NEGATIVE ON THE STOCK IN THE PAST. THANKS
• I'm short it— it should be a disaster, but it's a tricky stock to be short.

have you gone max short then? or are you wating for the failing rally you are talking about? I want to get short too.
• Max short? Nope— not until after the Fed stops and tells everyone. Until then, I'm selectively short... and happy being so.

Here's what my brother, a former Wall Street securities lawyer, said about the question:
packaging things up as MBSs does not solve a lender's problem - they typically have to retain a risk by offering to buy back non-performing loans from the pool. One would have to look at their MBS prospectus and see if the settlor has to guarantee payments or liquidity.

Rightside, I wish you all the best in your trading. Hopefully this works out for you.

If you want something done....

For those of us (myself included) who aren't yet savvy enough to understand the innerworkings of shorting a stock:

The Basics of Shorting Stock

I would be interested in joining a small group to pool some money for two reasons. One it actually motivates me to do real research and two I think face to face interaction avoids alot of the extremist viewpoints that anonymity affords.

Which brokerages allow you to short stocks? I use TD Ameritrade(formerly waterhouse). Shorting with them is not easy. Either you already have to be long, or you have to call into their trading desk and ask if the brokerage has shares you can short. This makes shorting very hard because on a day to day basis you can't tell what will be available, and its a bit counter-intuitive. If the stock were going to decline, or a large group of people thought it would, why would the brokerage buy shares and then lend them to you to short?

Josh

Shorting is very easy with Fidelity. I am surprised it is not just as easy with all the major on-line brokers. For any shorting, you need to have a margin account established number one. Next, since shorting is done on margin, you need to have some quantity of equity in the account to cover the margin. Onde this is established, the process is simple.

I am amazed that you have to call the broker to find out how many shares are available to short, this should be available to you on-line. With Fidelity online, just select "sell short" and select the stock symbol and it automatically pops up a screen that tells you exactly how many shares (if any) are available to short.

I got a response back from Bill Fleckenstein.

What do you think are the drawbacks, if any, of shorting LEND now?
• ...that you could get squeezed hard in a rally.

Lickitysplit -

Thank you for that link to the Basics of Shorting Stock!

MUCH appreciated.

The link failed to explain the dangers of shorting. You can get caught in a short squeeze:

A situation in which the price of the stock rises and investors who sold short rush to buy it to cover their short position and cut their losses. As the price of the stock increases, more short sellers feel compelled to cover their positions.

You can lose many times your initial investment. Many times.

The risk of shorting is that you can be early in assessing the loss of a company. The markets may take many more months to price in the loss that will eventually take place. Rallies can happen before the big loss.

Small players can get run over by the pros in a short squeeze. Shorting is for the pros!

Well I'm no pro and I'm making a killing shorting homebuilders, and I expect to make a LOT more with the Puts. The short squeeze is not nearly as dangerous as you make it out to be. Yes it can make you nervous at times, but it only causes short term spikes. As long as you don't overdue it on the shorts to leave a nice buffer for these spikes, you are fine.

I'm not into day trading like a lot of these yahoos. But again their games only cause short lived spikes. As long as you go in it for the long run and leave some buffer you can't go wrong. I said it once and I'll say it again. Does anyone on this blog truly believe that TOL or KBH stock has any chance of being worth more in two years than it is today? Of course not!

So don't be so conservative Poway, you've gotta have several hundred Gs banked after selling your house. Why not pull a little of that out from under your mattress and make some real money?

I'm afraid to short. I won't do it.

I believe homebuilders, retailers, and lenders will be down a LOT over the next few years.

But I know there will be rallies inbetween the downs.

The rallies can cause a short squeeze, and the big traders know how to kill a small guy like me.

I won't take the risks.

I would consider an inverse fund, but don't know of any that short real estate. The ProFunds is a REIT inverse fund, so that doesn't qualify.