What’s up with the HB’s

[LA_Renter]

HB stocks are soaring through the roof right now. I know the market can be manipulated but jeez. Is this the mother of all short squeezes or am I missing something here?

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

This is why I will not invest (long or short) in individual stocks, Too hard to play against the house (Brokers in NY).

If I get brave I may short the qqqq’s if it goes a little higher from here.

[LA_Renter]

Actually I am not short right now. I like to look to Wall Street due to its ability to gauge future earnings. And then sometimes you get to see Money Managers trap retail shorts in a squeeze. I guess that’s what is going on here, you couldn’t get worse news about housing right now and its happening on a daily basis. Yet these stocks are behaving like we are entering a new boom. And we all know they ain’t happening. CNBC is drooling over falling interest rates and the worst is over which leads me to believe we are now entering the “its never been a better time to buy” phase we were all predicting. Get ready for an onslaught aggravating perma bulls.

[FutureSDguy]

Many buyers will believe them when they say “its never been a better time to buy.” They will see that the prices fell a bit, and it just might go back up and prices will be even more unaffordable. Banks will continue to give ARMs with zero down to help these buyers.

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

I really think they have already rode this horse into the ground, then picked it up and rode it some more, It would be hard to imagine them riding it much further, Maybe they can make the horse get up once more just in time for November then it will probably die for good. We will see.

[powayseller]

I’m a novice with shorting, so can someone tell me if I did the right thing by not shorting or getting put options on homebuilders. But with put options, you still have a chance of making money if the stock goes down before the option expires, right?

[The-Shoveler]

Nor_LA-Temcu-SD-Guy

One last bit I will add, Every Dollar you make in the stock market, is a dollar the leaves NY, seems over simplistic but it’s true. They are the house.

[LA_Renter]

I agree with Nor_LA_Temec_SD_Guy. Even if there are buyers who buy this line they won’t show up in the numbers. Affordability is way too low. There are two key things I am watching moving forward 1) Exotic loan resets 2) true impact on economy.

Especially here in CA how many people are discovering they over extended themselves? Home price appreciation was a central tenet to making these exotic loans work. What is the fallout now that home prices are falling? How will that further impact inventories and prices?

There is a great contraction of RE and RE related jobs that is now occurring that has not really shown up in the data. The new mantra on Wall Street is that a bottom is in clear site. The assumption of this bottom is that the economy will remain robust during the housing downturn. (And we all live happily ever after)
Lets apply another assumption, we are heading into recession (have you seen the deepening inverted yield curve?) Recessions erode demand i.e. job loss, loss of income, fear of losing job. Exactly how much will a recession impact demand? I don’t think we will have true answers or gauges to these questions until 2008 at the earliest. IMO I think many experts are under estimating the impact of these exotic loans. Thats where we as a nation and especially CA are in totally uncharted, untested, and very dangerous waters.

[MH]

Here's a layman's answer – hopefully someone with detailed knowledge will either confirm / deny.

Shorting, IMHO, is an awfully brave move for we mere amateurs.  Unlike buying a stock outright, if you've bet wrong (and the buyer of your shortsell, et al, think you are) your losses are theoretically infinite.  I.e., if you buy a stock (like I did w/ Mooney Aerospace) and they go belly-up, you lose all that investment.  BUT, if you short a stock that eventually triples, you lost 300% of your initial position…  That said, as long as any return from reinvesting the proceeds of the short-sell exceed any gain in the stock you sold, you can still come out ahead.

I haven't short-sold any one stock, but did buy MYY which is an ETF (exchange traded fund) that shortsells midcaps.  That way (I hope) my potential losses are minimzed.

 WRT options – yes, you can still end up ahead on a put as long as the market (stock) declines.  If you look at the option chains, you'll have a lot of choices… Say ABC corp is selling now for $100, you will find options that expire next week, next month, and for the next several months at least.  Each of those dates will have various strike prices – buying the right to make the seller buy ABC at anywhere from (e.g.) $90 to $110. 

It should make sense that the $110 option will cost more since there is already a $10 "in the money" difference; all else being equal it should cost at least $10 to buy that option.  Depending on how low you want to buy, the "out of the money" options can be pretty cheap – a put option for ABC for $25 would be really cheap since no one would expect that much of a drop (again, this is all notional).

 So… I've bought puts on both QQQQ (NASDAQ) and DJX (Dow Jones Industrials) that run through Jan 07 and Dec 06 respectively.  The QQQQ is a longshot (very low strike price) that I got for .20 per share.  For the DJX, I was a little more conservative (higher strike price), but that costs more in "insurance" and I had to pay .80 to buy each of those.

 Finally, to answer your last question directly – you can make money at any point before the option has expired.  So, if investors start thinking the market will drop my options would gain value and I could sell them at any time before they expire.  Or, I could let them expire and, if the price is less than the strike price, I'll get the proceeds.  Of course, if the stock is worth more than the strike price, it becomes worthless – there is no value in "forcing" someone to buy a stock at a lower price; "allowing" them to buy it at a lower price is a call option; a different deal.

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