How Long to Hit Bottom?

[powayseller]

When will this RE market hit bottom?

Last year was another record year for IO loans, which won’t reset for 3-5 years. The buyers of my house got a 5/1 ARM in January 2006. Ok, so in January 2011, their payment adjusts. Until then, they are insulated from rising interest rates, falling prices…They’ll keep making their payments. No forced foreclosures due to their ARM resetting until 2011.

Perhaps we’ll have some big drops in price, but this thing will keep going down until at least 2011. Maybe the rate of change will get smaller, but it won’t be done.

Does 7 years seem reasonable to hit bottom?

[lostkitty]

True – I just dont know how to gauge this thing. Cant really compare it to similar historical events since the loans and information flow were different. I think this is why I am following it so closely. I have no plans to move, and all the way out here in upstate NY am fairly well insulated from it all since we bought before things went nuts. However, I watched with some confusion as the prices kept climbing (I thought it was over the top three years ago). I have a large family all in the Solana Beach/Del Mar, La Jolla and Coronado areas, and wonder how it will all go (none of them has these loans – so not worried, just curious). Fascinating stuff!

[Anonymous]

Poway

Congrats on that long in Gold as it is working out nicely for you. I just wanted to comment on one post you got regarding gold about insiders and what they were doing. Buffet buying gold in 1997 where the high price for the year was 482 is hardly a sign of an insider telling you to buy it now. Gates, reportedly buying gold? I do not know about that or what his track record in this area is. He is not known for being a genius investor, just a genius in software.

If you truly want to follow the insiders in commodities, study the COT (Commitment of Traders) report. This is published weekly, and reports the positions held by 3 groups. The Commercials ( the real insiders ), Large Speculators ( people like me ), and Small Speculators ( individual investors ).

The Commercials are the actual producers of the commodity itself, and hence have the best record of being correct about price direction. In general, they tend to be on the short side as they hedge their bets on price fluctuations on what they actually produce and sell. They are the true insiders, not just a few big name individual investors. Follow them and you will get the best read on where things are likely going in the next few months to a year.

Just to give you one example of recent activity. The Commercials were heavy buyers on the dip in gold in March when the week closed 3/17 the price was at $560.20. This told us the true insiders were betting on a price rise, and off she went. You will see this over and over again with these reports. Presently they have a position that is in the middle, not bullish or bearish.

Oil. On 4/17 when the price closed at $75.17 the Commercials had gotten heavily short Oil, and this past week you saw a nice selloff there. This is no coincidence, and just a couple of examples of how to really watch the insiders.

Sorry, off topic. I did not recally where in the past I saw that reply to your topic, so I did not know where to go to give you this.

If you have any additional questions regarding this you can email me at [email protected].

Hopefullt this is of some value.

[powayseller]

I bet everyone who reads these forums hangs on to your every word. You’re very knowledgeable about investing, and I appreciate what you’ve been teaching. I will contact you by e-mail…

[Jim Brubaker]

Chris I think there is more to it than that. A commodity producer has two items to look at. Cost to produce the product and the price he can get on the market. A lot of gold mines are barely profitable at $300 per oz. So right now if the accounting department can sell a forward contract 3 months out for 1,000 ozs at $600/oz, they have a $300 per oz profit without any speculation on their part.

From there, you have puts and calls on the commodity. An airline will normally buy staggered calls covering the whole year for jet fuel. This guarantees them a known cost for fuel for the year. One of the reasons the last airline went into bankruptcy it because they thought that the price of fuel would go down and they figured buying the options was a waste of money.

If you were a corporation or bank that had $10,000,000 for example in another country (you sold your corporation or sold a lot of hamburgers) and wanted to guarantee that if they devalued the dollar you would still get your full amount, you would buy puts against the dollar.

The options are mostly for removing risk from a transaction. From there, you have the underwriter (pronounced speculator)of the option, that person is willing to take the risk for a price for a certain lenght of time. If you bought 100 shares of Google and sold calls at $40 above todays price, and the stock rose $40, the stock would be called away from you at todays price +$40. You made money, go do it again. If the stock drops $40, the option won’t be called, but you broke even for the day.

The real trick is timing. Warren Buffet had a bet that the US dollar would fall, and everyone knows that its an absolute certainty. He lost 2 billion.

Then there stupidity. Take the California legislature that noticed that the contract price for natural gas was 3 times the spot price on the commodities market. They decided not to renew the long term contracts and buy on the cheaper spot market. The reason that market was so dull, was because everything was on long term contracts. What happens when a 90% market consumer, switches from contract to spot–lets just say it was a pretty dumb move.

Speculators do make money now and then– Its kind of like horse race betting, you either do it for two years and quit or move closer to the track and live in a trailer.

[LookoutBelow]

Futures trading is dangerous stuff, dont play unless you got a LOT to lose.

Gold is HIGHLY overvalued and speculated up to the point of sillyness, it cost NO MORE to mine that sutff than it did 5 years ago, there is no shortage of it and central banks of the world have been divesting themselves of it for the last couple of years.

Just like oil/fuel. Heavy speculators looking for suckers.

WHats difference between gambling and investing ? I almost forgot ?

[Anonymous]

Jim

I am a professional trader, and what I explained is the best way to know what the insiders are doing. The actual producers are the real insiders, this is a provable fact. There is not more to analyzing what the insiders are doing, this report shows it clearly. If you want to add alot of other variables into your decision making process you can.

Everything you have stated except in the first paragraph is completely unrelated to commercial activity in the commodities markets. Those entities are not commercials. Airlines for example, are consumers, hence not commercials. What you are talking about is hedging by speculators. In general you would want to have the opposite position of the hedgers in that group as an investor. Commercials cannot afford to speculate like that, and they do not. General Mills does not do those types of things. They hedge their raw materials in the futures markets.

Commercials are not speculators, they are producers. Commercials have to report on a weekly basis their net short or long positions, and this is what is in that report. This does not involve options, it is a report on postions in the markets.

As a trader I want a loaded deck, and I will not throw darts at a board. The COT report is the best way to begin this process. I could provide you with literally hundreds of tests that prove the legitimacy of this. Very rarely if ever does a major rally happen in a commodity without the commercials being heavily long.

I wish I could post a chart here which I emailed to a few people in here that shows the COT report charted with the price of oil. You would be able to see the clear relationship.

Those things you mentioned may work, but as a trader I stray away from the paralysis of discretionary analysis and it has served me well. You are right about the real trick being timing, and the best way to time what the insiders are doing is the COT report.

The ideal setup to buy gold for example, would be an uptrend in price, which we have, a pullback in price with the commercials going to a heavily long position on that pullback. This would be a loaded deck. Also, it would be even better if that occured at the typical seasonal low for gold which is August.

The Buffet example is a good case in point about paralysis of analysis leading to a arbitrary conclusion that cost him alot of money. Buffet is brilliant, but not a commercial, he would be a large speculator in the COT report. The report is not based on size of the investment it is based on what you are.

Had he used the COT report, that is not a transaction he would have made at that time.

You seem like a good guy from your posts, so hopefully I have not offended you with the strength of this reply. If the COT report is of no interest to you than do not bother with it. If it is Larry Williams has written the best book on it.

BTW, the commercials are currently heavily short the S&P 500. This is the main reason I went to cash recently in stocks, along with the seasonal tendency for a decline into the fall. It certainly sounds like we have different trading styles, so the age old battle would always be waged about whose style is more effective. I just stick to what works for me year in year out.

I sure wish there was a COT report for real estate! I bet it would show the commercial heavily short right now!

[adad]

Gold and the USD ….

Someone I have been following who did very well in the early part of the gold bull market and always has good insights is Paul van Eeden. You can read about him and browse his past, free commentaries at paulvaneeden.com.

Here is an excerpt from a recent commentary:

Why the gold rally will continue
April 2, 2006

Thursday was an interesting day: the US dollar fell sharply against the euro and other European currencies, causing a spike in the gold price. Silver and other metals prices also benefited. US bonds fell, US stocks fell, US interest rate rose and the gold price increased. There it was: the dollar falling with rising interest rates and a rising gold price. Regular readers of these commentaries know we were waiting for this exact scenario. Under these conditions, I expect the gold price to continue to move upwards; even though it never does so in one, smooth, straight line.

The dollar is dropping dramatically. It will bounce soon – it may already be starting a bounce – which will cause a pullback in gold, but it is on its way down hard, so gold and oil will continue to go up.

Obviously the relative value of the USD to the other major world currencies isn’t the only factor effecting the price of gold, but it is definitely one of the biggest over the long term.

BioNuclearBunny.blogspot.com

[powayseller]

That VanEeden site is great. He insists gold is money, and people get confused about its price moves when they treat it as a commodity. He also explains why jewelry demand and the ETF are so small compared to the total daily trades, that they have no effect on price movement.

One month ago, he predicted the weaker dollar would lead to higher oil and gold prices.

He makes simple logical points: continued supply of Treasuries will cause their prices to drop and yields to keep rising. As interest rates rise, more of our government money goes to finance our debt.

He reminds us that the US consumer is responsible for China’s growth (we are 40% of their exports), so when the US consumer slows, so will China’s growth as well as the prices for commodities. Good stuff…

[Anonymous]

Wow! Talk about an unanswered question and a hijacked thread. The initial question is a great one and I am keenly interested in the answer. How about an educated opinion and the thinking behind how you reached your conclusion for us all to ponder? Thanks!

[powayseller]

I’m not sure what you’re asking. I don’t mind when my threads get hijacked. Some of my threads don’t get any responses at all, because I tend to ask questions that no one can answer, so at least this one generated a discussion.

I’m attending the UCLA Anderson Forecast seminar downtown tomorrow, and I’ll ask them, if I get a chance, how long they think it will take to hit bottom, and how they arrived at their conclusion. Is that what you wanted to know?

I was repetitive also in my question, since we’ve discussed this before. It seems most people think it will take 7 years. Check out the Bubble Primer: it took as long to go down as it took to go up in the other 2 downturns.

I just spoke with a friend, and we expressed our impatience with how long it takes for this bubble to unwind. Our impatience doesn’t help. These things jut take time to unfold. Next year, more ARMs will reset, but there are other people who won’t be forced into foreclosure for many years, like the buyers of my home who got a 5/1 ARM in 2006. It will be 2011 before they find out if they can afford the higher payments. So we’ll see continued struggles among homeowners until at least 2011, and as long as people are facing foreclosure, there’ll be downard pressure on prices. Sure, we can go out and buy a home now, but the person whose ARM adjusts in 2011 and has to sell quickly, will bring whatever prices exist at that time, even lower. If you want to wait for the very bottom, to minimize your entry cost, you’ve got to wait 7 years at least. That’s my opinion,and that’s what we’re prepared to do.

[Anonymous]

Yes, I am interested in opinions on how long it will take for this market to bottom out. I am also curious to hear the reasoning used to reach any date that may be stated. I am also impatient waiting for the bottom. It would suite my purposes if it were to bottom out in 24 months or so. Don’t try to tell me the housing market does not have my personal best interests in mind. Thanks for the reply!

[zk]

My guess to hit bottom is also in the 5-8 years range. But if you look at the last cycle, even though it took 7(?) years to hit bottom, most of the fall in prices came in the first 4-5 years. I could be wrong about that, but that’s what I see when I look at the graphs and what not.

Perhaps, if that scenario repeats itself, it might (depending on your situation) not be worth waiting out those last couple years before you buy. Of course, at that point, the psychology of the market (assuming prices do drop fairly significantly) will probably be “don’t buy a house; you’ll lose money.” And timing the bottom of the market is as hard as timing the top of the market, so you won’t know for sure what the future holds. So it’ll be scary buying a house then. But not, if you ask me, as scary as buying one now.

[powayseller]

Timing the bottom is easy. You look for the leading indicators to reverse. The leading indicators in housing, as far as I know, is the rate of change in inventory (year over year), days on market, months of inventory, ratio of sales price/list price. You’ll need MLS access for this. When these change, you’ll know the bottom has passed. And you will be 3 months ahead of the general public, which is relying on dated information from Dataquick.

Dataquick is 3 months behind the market. We are just now getting data on January offers. January offers close in February – March, and are reported the following month, either March or April.

I plan on checking back to see what Rich’s data holds, too.

What could be different this time is the magnitude of change in the early years. More people will be forced into foreclosure, probably 10 million (see OfTwoMinds.com, and check his Housing Bubble and Financial Meltdown articles, this guy has all the data on the national scale). The bulk of foreclosures will come on-line in 2007. After that, the rate of decrease might slow down. If interest rates pick up to 8% or 9%, the mortgage interest deduction may balance out with the loss of equity as the market continues its decline.

We also should ask why we yearn for a house. Do you want something to fix up? Do you not like the paint? Do you want a bigger yard? I believe a rental house can offer all this. I am planning to do some painting this summer. I will do some myself, and hire out the rest. I’ll plant some flowers, too. I’m adding A/C, in cooperation with the landlord. A rental house is a home, too. To maximize financial gain, we have to expect a wait of 5-7 years.

[Jim Brubaker]

I think that we are making a mistake by thinking that the real estate bubble is a one item event. I believe that its going to hit in other ways first, Stock market crash, banking collapse, foreign exchange panic, massive unemployment, war,take your pick.

Whatever combination that it might be, it will drastically change our mind set about the future.

On the way up, every stock bond or house has an owner, the same is true on the way down. When prices are revalued downward, money evaporates from the monetary system.

As for the time span, its kind of like the kids in the back seat asking “are we there yet?”

[Author]

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