[cooperthedog]

I used to visit regularly in summer of 2006 & post occasionaly. At that time the average person on the street didn’t think the housing market would ever slow down, much less collapse, so it was very interesting to review the analysis and debates. Since the housing crisis became front page news (and I don’t reside in SD), my need for an alternative/rational viewpoint has faded, though I’ve lurked here from time to time. Everytime I read a rosy NAR report trying to spin horrid numbers, I think of Piggington’s!

One thing that I miss is the market (financial) discussions. There were many good posts on investment ideas, economics, market direction, etc. The board seemed to have several intelligent posters (and a few zealots), which made for informative and entertaining reading back then. Maybe I should start visiting again…

[cooperthedog]

Daniel – I think your assumption of using options or other derivatives is correct, as those funds don’t track nearly as well as the inverse funds, especially during large moves. I don’t see another viable method.

[cooperthedog]

powayseller, The inverse Rydex funds that track the major indices (e.g SP500 & NASDAQ) do *very* well in matching their performance. I’ve included two graphs that should illustrate the point. They remind me of inverse function graphs from math class. I’ve included a popular ETF as well (SPY & QQQQ) for each chart.

[img_assist|nid=1026|title=Rydex Inv SP500|desc=|link=node|align=left|width=400|height=228]

.

[img_assist|nid=1028|title=Rydex Inv NASDAQ|desc=|link=node|align=left|width=400|height=233]

As for ProFunds, I believe I may have made a blanket statement regarding them 🙂 as I do not use them nor have the relevant data at hand to confirm or deny your bloggers experience.

As for Weiss, I’m not saying their data is flawed, in fact it looks like a great service. But, directly comparing their A+ to E- isn’t fair, since the bond funds differed by investment objective/timeframe.

[cooperthedog]

Equalizer – Rydex & Profunds that are leveraged and/or short the market *are* horrible investments to hold long-term, just as shorting an index/stock or buying on margin for 30 years is a very poor choice.

These funds are not designed for that timeframe. They are designed to allow investors to short an index or use margin for a limited time. Their expense fees are far less than what a typical online broker would charge for margin (~10% these days). So, they are good alternative to shorting/leverage via your broker, and the only viable option for many retail investors use in a tax-deferred account. For those who don’t use/aren’t comfortable with margin, they would be a poor choice.

[cooperthedog]

Just to balance the data:

These are just *two* PIMCO funds in the gutter. They have several funds in the top 10%.

Also, the E- funds are in the long bond category, and invest in gov’t paper, while the A+ funds are in much shorter term corporate paper… I assume the risk adjustment shows the under/out-performance of a fund to its investment style, but comparing the A+ to E- funds isn’t truly apples to apples. As one who investigates the data and debunks the relevance of popular statistics, I’d think you’d have issues with that…

Plus, many Rydex & ProFunds offerings are essentially index funds that investors trade to implement their own strategies (direct, inverse, leveraged). They exist to match an index vs. activley attempting to outperform the market, like a typical “buy & hold” mutual fund. These funds can be great tools to allow an investor to bypass the inability to short or use “margin” in their IRA/401k (for those that can tolerate the substantial risk).

[cooperthedog]

Leung, futures are highly leveraged. The performance bond (margin) required for the San Diego contracts is ~2K (one contract is ~75K). Also, futures are “marked to market” daily, so should you sell a contract, and it increases in price, for any reason, you will have to put up more money.

So, even if the CSI closes down 20% in the next 9 months, but prices rise/fluctuate in the interim, you will need more capital to meet margin. Add to that the lack of liquidity and you will be taking on an awful lot of risk if you can’t hold until settlement (and that’s assuming that the market declines more than the 4-5% current discount).

I’d also make sure to analyze how the underlying CSI works in detail. Since this index comes out once a month and is not really “commoditized”, it will be impossible to gauge what the current value is day to day. With no ability to arbitrage the index, prices could theoritically be manipulated.

I still think it is any interesting, and potentially profitable way to play the decline, but it sounds like you need more risk capital before considering it further.

Chris J. appears to be a pro futures trader, so I would ask him what the appropriate capitalization would be to enter into a contract (under the assumption that SD RE will plummet near term & with the intent to hold until settlement).

[cooperthedog]

The US is not a pure free market system, it is mixed. For example, the Fed’s (quasi-govt agency) impact on interest rates or the price curbs on exchanges. Most would argue that controls such as these are necessary, yet they constrain a purely free-market.

Of course, there is much more transparency for most of these controls (at least one knows that there is a potential for action, timeframe, etc.), whereas these secret meetings with unknown results not only cause distrust, but could put investors at a disadvantage as well since the large brokerage firms that are involved in such a system would have an unfair advantage (e.g. knowing where future support lies), and pass that knowledge to their trading arm.

[cooperthedog]

powayseller, the CPI is not useless.

You tend to make some very black or white statements regarding what is generally a very grey area (econometrics, forecasting, etc.).

The CPI may have its flaws, but it is not useless (plus, how can something like the core CPI be *more* useless…). You have to understand that these statistics are designed to give general overviews, applicable to a broad swath of the public, and that your mileage may vary.

Just because it is not applicable to *you* does not mean it is a useless indicator for others, or in general. Would you say that the average height is a useless predictor, since it doesn’t indicate your exact height? Is the closing price of the SP500 useless to investors since it may not accurately weight and value your personal holdings? Should we abolish these general metrics and institute millions of spot-on indexes for each individual? I would venture to guess that the “powaysellerCPI” would be “more useless” to Daniel than the government’s version.

I do agree with the original thread topic. Rich people don’t use their arms – they pay people to do their heavy lifting… (groan…)

[cooperthedog]

Another factor to consider is that most builders advertise their base price, which could be anyway from 20-100+K less than what the final price will be.

So, if the flipper has added 100K in options, they will tack that onto the base price (plus their “profit”), but I would assume most new buyers would want to add their own options, thus ignoring the flipper property, & gravitating towards the builder’s lower base price (not realizing the true finished cost until their visit to the design center…)

All of which doesn’t bode well for the flipper – add in the incentives discussed and rate buydowns the builder can afford out of their 10-20+% profit margin, vs. the flippers 5-15% cost hit, and it gets ugly.

Also, many buyers of new construction ask for the brokers coop, or use a realtor who will provide a kickback/contribution, something the flipper can’t do unless their FSBO, which in this market would more time to sale, increasing carrying costs…

[cooperthedog]

leung_lewis: The options page is a link to an XL file (not quite real-time…), I’ve always found it populated:

http://www.cme.com/files/housing_ioq.xls

It appears that the bid/ask on a May07 put (strike 242) is 9 – 12.5 (yuk). The current price for May07 futures is now ~4-5% lower than the May06 CSI, with a bid/ask of 236.8-238.6.

Also, it is my understanding that the contracts are roughly two months behind, so the May07 is settled based on the value of the March CSI. The CSI is based on SFR, so it doesn’t look like a condo crash would influence it. The index is rather nebulous as underlying, maybe that correlatates to the low interest?

Open interest is tracked here:

http://www.cme.com/daily_bulletin/Section46_Housing_Futures_And_Options_2006142.pdf

[cooperthedog]

powayseller, what you choose to invest in is completely your own business. I am merely suggesting that the disparity you claim to be witnessing between the leading indicators (a 10-20% decline) & lagging indicators, (such as the Case-Shiller Index), along with your strong belief of an accelerating crash would make CME housing futures/options a perfect outlet.

Their liquidity is irrelevant to your situation, if you can sell a few contracts or buy a few puts, even with a horrible spread, you would make a killing at settlement, *if* your leading indicators are correct. If your’re wrong, and realize it in time, then you do run the very serious risk of not being able to get out of an illiquid market, something I would assume a professional system trader, such as your advisor, would want to avoid. But, we are working under the premise that your data is a sure thing, and that prices plummet all the way to settlement…

I guess I’m just being overly sarcastic now. I’m glad you got out when you did. Even though I think the market will deflate for years vs. pop, and that all the RE data can be intepreted various ways, I wish you luck in your investments & eventual repurchase.

[cooperthedog]

I’d want to know if this financial planner has any of his own funds invested in the project. It seems like you should be able to get the reports by having your friend request them.

I’d also be curious to know if there are any unique aspects to the property (by a lake or recreation area)? Is this the closet private land to the refinery? Do they plan to put in basic infrastructure? How is the land zoned, will that change? It would be interesting to find an existing, comparable refinery and track property values and how it grew over the years.

It does sound like they have a good track record, that spans decades, so they should have experienced boom & bust cycles. Has your friend used them before? If not, can you verify their record?

[cooperthedog]

The lack of volume and the wide spreads are a deterrent to *trading* these contracts, but you will always get the market price on the contract, it may not be inline with the underlying, but it will be at the market – which brings up the lack of arbitrage on such an index, which is another strike for trading these.

For those investors who are so sure of a large crash in the upcoming year, holding until settlement or expiration would allow you to get the market (index) price.

Homebuilders have already taken a beating (not to say that won’t continue), and may have significant exposure to markets outside of CA that aren’t so overvalued. Plus you have to factor the risk of buyouts if the stock gets too low, etc. Compare this to the San Diego CS Index value, which is only down a few percent down from the 2005 peak. It would appear that there is alot more downside potential there, if a crash does occur, which may justify the spread & lack of liquidity on a CME housing put.

[cooperthedog]

Daniel – All the gory details of how the Case-Shiller Index is calculated can be found here:

http://www.macromarkets.com/csi_housing/documents/TradableCSI_Primer_Brochure.pdf

I believe you’re right in assuming that the index won’t be able to capture all features of the housing market, but it should be acceptable to “bet” on for retail investors, though institutions may balk at the imprecise underlying.

[cooperthedog]

powayseller, I do not wish to make you look like a fool, & any efforts I put forth couldn’t match your own…

I do not disagree that real estate in San Diego is a risky proposition, especially for recent purchasers, and that prices have peaked and are starting to decline, but to what degree and extent is currently unknown. I do not agree with Mr. Gin’s analysis, my point is that citing anecdotal evidence and conflicting data is no better than lashing out at someone for errors in their (Gin’s) forecasting model. Also, labeling someone ignorant is vastly different than calling them a liar.

As for conflicting data, above you quote a 10-15% decline in *price* and then qualify it with an increase in *sales* of upper end homes (?). You state that “price drops are occurring everywhere”, which I assume you mean to be all price brackets, couple this with recent statistics of a huge buildup of inventory on the upper-end and slowing sales in the high-end bracket, which would pull the last reported median down (more than 1%). Also, the Case-Shiller index is also down less than 1% as of May06 from what appears to be the peak in San Diego prices 4Q/2005 (and its up yoy). So what you’re observing in the market vs. what is actually occurring *overall* may be different -OR- it may be the same and about to be reported in the new numbers (since these indexes lag a month or two)… which brings me to the point about CME futures.

Since you possess a wealth of insider knowledge regarding local conditions in the *overall* market, and have tracked a major disparity between current real prices and the last reported median & Case-Shiller index values, selling housing futures would present a perfect opportunity for you & others (I’ve considered these myself). Also note that the Case-Shiller index compares *same* house sales where possible, vs. median prices, also note that the co-creator of the index (Shiller) went on record last year proclaiming a housing bubble, so I doubt the index is biased to the upside or that he is “lying”…

You’re statement that you would not trade the Case-Shiller index because it is not liquid enough does not make sense.
Liquidity isn’t an issue with the large price disparity you are quoting. As you put it, “a 10-20% drop or MORE!” (which has yet to hit the index) would easily cover the spread, and you could sell a May07 contract and wait unitl “delivery”, avoiding any trades, or buy a put option to limit your downside.

Also, you appear to quote numerous books, columnists, and other sources, yet appear to have no insights of your own. By posting these viewpoints you are benefiting users on this board, generating discussion and the like, but you must ultimately come to your own decisions, based on your own values and analysis, not because someone else said it was so (which is what got alot of real-estate “investors” in trouble in the first place).

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