(Almost) Last Chance to Get out of Stocks

[Anonymous]

Timing is always critical to any kind of investing, whether options or S&P500 index funds. You want to buy low, sell high, etc.

Since we all think that the housing market is on the verge of collapsing, then isn’t it logical to conclude that now is an ideal time to bet on housing stocks to go down (long term)? Your right, timing is important. Now is the time to sell real estate and short anything housing related.

[qcomer]

I won’t recommend people to panic and run to their retirement accounts and take all of their equity out. With your retirement account, you will never win trading in and out of what is hot and what is dead and should review your investment strategy and objectives twice a year but don’t take money in and out every month or so. The fees exiting in and out of funds will eat away large part of your profits in the long term. Also, not the entire developed world is facing a financial crisis like US so there are still lots of good funds to invest in for long term. Even in US, you can buy companies that make more than 80% of their money from sales outside of US and don’t have huge debts like our automakers.

Invest into cheap blue chip international giants. There are lots of large companies with P/E from 15-20 and moderate growth. You can also invest in large international dividend yielding companies.

[Anonymous]

I do not agree that shorting home builder stocks is a no brainer. It may work from here but here is the fly in the ointment. The valuations on these stocks are very low, and most have very low debt ratios as well. This makes them far from obvious short candidates.

What I want in a short candidate is high debt, poor earnings, and high price to sales ratios. These stocks have none of those 3 things. They may go down, and you may be right. However, my trading philisophy is to have as many things lined up supporting one direction as you can have. These stocks do not meet that criteria for me.

However, you made a great entry, so congrats! If this whole thing really unravels you will probably be proven right. In my trading I trade by systems, not opinions, so by the numbers, these do not cut it for me.

Nice Trade

[Anonymous]

Just wait for the housing futures. They will be pure play on housing directly. Unless they continually dealy their launch due to politics.

[lewman]

I also took a look at builder’s stocks a few weeks back and have to say that at least in the short term they have been driven down (30%+) since early this year so even if you believe they’ll keep going down over the next few years today may not be the best time to short as even dead cats bounce back somewhat. And as Chris J said, the stocks’ valuations aren’t really that excessive at the moment so there’s a chance that they could just range trade over the next few years.

I’m also looking at mortgage companies that depend heavily on mortgages. Companies like bay area based Golden West Financials (GDW) which Wachovia’s buying. GDW derives a high proportion of earnings from mortgage business and over 30% of those mortgages are ARMs. Unlike builder stocks that have been beaten down GDW’s still quite near its 52 week high. Any comments ?

And as I mentioned before there’s always the housing futures that’s supposed to be launched in a weeks time. You can find info here at Chicago Mercantile Exchange http://www.cme.com/trading/prd/env/housingover16250.html

Btw, I read that the Grizzly fund is one of the few “true” short stock market funds available.

Powayseller: Could you tell me where you opened your futures account ?

[PD]

I wonder if there are some big players who don’t want housing futures out there? The builders as well as NAR keep saying soothing things because they don’t want people to panic. Buyer confidence a large part of price movement, both upward and downward.

I am also wondering why there aren’t more big thinkers in the industry (schools, researchers) who are saying there will be a severe downturn. Maybe they are afraid of being wrong? Or want more evidence first?

[Jim Brubaker]

Be careful on short selling. There is another game played out there. An investment pool will pick a stock that doesn’t have a lot of shares, say under 60 million, that is being shorted quite a bit. Then they start buying the stock, forcing the price up, the shorts have to meet their margin calls (daily). In fear, they buy the stock back to cancel their short position. That buy order makes the price of the stock climb even higher. This starts a vicious cycle upwards

The entity performing the short squeeze also has the advance knowledge to sell puts in the money and buy calls out of the money.

This is what can take common sense out of the market.

Another thing to bear in mind with options. They are thinly traded in some areas, just recommending them for others to buy, can triple the price you’re going to have to pay for them.

[Anonymous]

Good comments, I agree that every inverstor has their own criteria and no one system is foolproof. However, a couple points that make it clear for me:

– Bring up the 5 year chart on any larger homebuilder and you’ll see that the price explosion occured almost exactly in sync with the current real estate boom starting in 2001. This is not a coincidence, and it is reasonable to think that the way back down will also be propotional.

– The major homebuilders prices peaked in July of 05 and have been steadily dropping since. The momentum is clearly negative as most homebuilders are solidly below the 200 day moving average. I look at trends more than earnings and the trends are clear. There may well be multiple dead cat bounces along the way but I am concerned with the long term.

– Most homebuilders have relatively low P/Es right now but that is immaterial. The market trades based on future earnings potential and expectations and the future earnings prospects look very bleak for homebuilders. The negative numbers are just starting to come in and will only get worse.

[powayseller]

I wasn’t suggesting in and out trading. I’ve been in Vanguard index funds since 1999, and just liquidated my positions. I did so in anticipation of slower consumer spending, and expected a stock market crash in early summer or fall. Little did I know that today a sell-off would occur due to inflation worries. I was just lucky there, as today’s decline was not for the reason I thought.

I did not recommend taking money out of retirement funds, only moving from equities to CDs. You can do this within your retirement account. I made the same move in my non-retirement accounts too.

I wouldn’t count on international funds to save me. The Asian economies are export dependent, and until they learn to stimualte internal demand, they will fare badly when the US consumer runs out of steam. Check Richard Duncan’s (Dollar Crisis) update.

[powayseller]

Re: futures account: Will post after it’s done. Making calls tomorrow.

[powayseller]

That’s what scares me. You can have a great idea, but be outwitted by the savvy pros, just on trading technicalities. Rydex inverse funds are a safe way to play the contrarian, right?

[qcomer]

I actually had a genuine question about this theory that housing downturn will reduce consumer spending thus bringing down the stock market in general.

Don’t we need to find out which sectors of economy profited most from this consumer spending spurred by housing in the last 5 years? If a sector didn’t benefit from the consumer spending then why a decrease in consumer spending should affect it? Other than REITs, commodities (PM), emerging markets, small caps, etc, are there any other sectors that blossomed due to the increased consumer spending? I personally think emerging markets(China) will get most affected by this reduction in consumer spending.

To me the cycle goes like this: More money printed and borrowed by govt increasing trade/budget deficit->money passed on to people via low rates to buy houses->housing prices boom->money taken out of houses to spend->huge trade deficit indciates that majority of supply for this increased consumer demand came from China -> profits boom in China (emerging markets) -> Chinese investors buy US treasuries from these profits, thus completing the cycle.

Anyway, if US stocks are going to tumble then does anyone have any idea when the slide will start (if not already) and when do we expect to hit bottom and which sectors will be most affected? Taking all your equities out based on the general thinking that reduced consumer spending will take down all stocks maybe the safe game to play for now. But I wanted to know if folks think that we can do better? And where?

[qcomer]

Poway,

Thanks for the reference to the link. I am in touch with all the blogs on iTulip and others portending a bust in stock market, the dollar crisis taking down the world economy, etc. I didn’t recommend investing in emerging markets but in huge companies from developed countries.

The whole idea about not touching retirement funds was that historically, most of us are bad at timing the markets. Also timing the market is a very dangerous game. The whole idea of investing for retirement is that since you are looking at 30-35 years time frame, you can benefit from the historical statistic that an index fund (dollar averaging and compounding) over this time period will beat most of us, managing it ourselves. Over 30 years, whether you succeeded to sit out a recession or not, wouldn’t really matter.

[lewman]

Re: China. I agree that a slowdown in the US will indeed adversely affect China’s economy. But it doesn’t mean that you could translate that into a short china play. The mainland Chinese stockmarket is basically still a closed market. The bear market started in 2001 and bottomed out in mid-2005 and since then has bounced 60%. This is pulling HK (there’re about 150 mainland chinese companies listed on the HK board) up along with it. There’s also money rushing into HK/China in anticipation of the RMB appreciation.

Re: Sector. Perhpas retail is one worth looking at. If consumer spending slows down, I would imagine retail would be one of the hardest hit sectors. RTH is the retail sector HOLDRS ETF.

[powayseller]

Trading in and out lowers your returns because people do it all wrong: they buy when stocks are going up, and sell when they are doing down.

If you do have some knowledge of recessions, and sit them out, you could double your returns, I think. It only makes sense. Financial advisors publish all sorts of charts trying to prove you’re better off staying in, because the mutual funds hate it when they get outflows of capital. Their marketing programs have worked well at convincing people of two stupid ideas: dollar cost averaging (yeah, just keep adding more overpriced stocks), and leaving your money in. I’ve read all those books, too. If anyone can convince me why I should stay in during the upcoming recession, I will consider the thought process. Until then, I’m out until I see the leading economic indicators turn around: wages and consumer spending.

[Author]

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