[powayseller]

EJ, you’re right. I’m not a loan officer, so I was giving vague figures. The principal stays constant, so the effect is actually less than 50% on an ARM, but more than 50% on an IO loan that starts into its principal-repayment period. Many ARMs start out with low teaser rates, at 1%, and then go to 5%. So while my numbers were inaccurate, the general gist is that your payments can go up a lot, up to 70% actually, depending on the loan you have.

Considering that people tend to get the highest payment for which they qualify, a move from $1500 to $1900 is huge. Although many of us would scoff at a $1900 payment, imagine your income after taxes is $3K/month, or $2800/month, and now your payment went to $1900. That is enough to cause a foreclosure.

Sorry that I didn’t run the numbers. Accuracy is important to me, and I should have verified before I posted.

[powayseller]

Was Lennar’s shoddy construction practices unearthed in Florida, with hundreds of building code violations per home, also prevalent in CA? How will the lawsuits and rebuilding of thousands of homes in FL, affect their bottom line? Has anyone followed Calculated Risk and Mike Morgan’s stories of Lennar? I’m wondering if Bressi was built better than their FL subdivisions. It seems like Lennar has shady management.

[powayseller]

One weakness with Zeal is they are bullish on commodities. I am not. During the 2000-2001 US very small recession, commodities got hammered, and I posted the data a few weeks ago, on which commodity lost how much.

US economy drives world demand, so our next recession, which I expect to be deeper and longer, will cause a commodity downturn. Just look at the IMF and Federal Flow of Funds data for 2000-2001, to see my point.

I wrote Zeal about this, and they did not respond. Zeal’s commodity bullishness will turn around and bite them if they don’t wake up to this fact. China’s boom cannot sustain when American slows down, because they have not stimulated internal demand. They are export dependent. That is China’s weakness (others are high bank loan losses, corruption, and lack of accounting standards).

If you use Zeal, keep the caveat in mind, that the commodities will start weakening as the recession gets going. As far as precious metals, I have no idea what the future holds. Chris J showed in his newsletter that gold prices are affected by changes in inflation, not by the value of the dollar. Get his newsletter to read the whole story. The charts show both the dollar and gold weakening since the late 1980’s, but in 2005 both the dollar and gold rallied together.

If gold is inversely related to dollar weakness, why was there a gold rally while the dollar was rallying? Wouldn’t the gold rally be delayed while the dollar was strong? So, the relationship is not something you could trade on.

Back to Zeal – they’ll probably continue being right while the commodities bull continues.

I got my July Yamamoto Forecast. Irwin T. Yamamoto is currently ranked as a top stock market timer and one of the top bond timers in the nation by Timer Digest. He sees an economic slowdown, and is bearish on gold, stocks, and bonds. He recommends 0% stocks, 100% cash. His cash picks are bank money-market accounts and to check bankrate.com for highest yields.

Yamamoto’s reasoning: stocks are pricey at 18x trailing earnings. Projects for 2007 are for slower economic growth, and even Bush expects GDP to drop to 3.3%. Buased on 2007’s outlook, stocks are too expensive. It’s not ideal to pay a premium for stocks when business activities are descending.
His take on gold and oil: We anticipated a correction in the gold makret, and got a $100 price drop. The bullion should feel moer downward pressue in this rising interest-rate environment. Yet as the economy slows, the loss of value in the dollar means higher metal prices later in the year. Oil prices will be supported by higher demand for the commodity during the summer driving season. Still, sooner or later, a short-term dip in prices is probably due to the negative effects of a softer economy. END QUOTE
Yamamoto Forecast, PO Box 573, Kahului, HI 96733 $350/year

[powayseller]

I looked at some rental houses in 4S ranch in late December. One house was real nice, but when I step outside, I feel like my neighbors are looking down on me. From the master bedroom, I can see into their yard, just a few feet away. I didn’t understand why anybody would ever buy a house so close to the next…I would never ever do it.

The second house had 4 bedrooms also, but each room was so tiny, that I felt claustrophobic. The backyard faced a busy street, and had one of those glass noise reducing fences, so you really have no privacy in your own yard.

Why would anyone buy a house like these? I didn’t even want to rent it.

I saw some construction just west of 4S ranch. Is that the area you all are talking about? I was told the builder was rushing to finish the houses before interest rates got too high.

I think the matchbox-size lots will be harder to sell in the downturn. The buyers of these homes were short-sighted, and I still can’t figure out why anyone would buy them. It’s a crazy way to live. Have you ever driven on the freeway, and seen communities of squished-together homes, separated by large fields? It seems so wrong to build like that. Why didn’t the builder buy those vacant fields, and spread the houses out a little bit? The are west of Rancho Penasquitos is like that too. Is that Carmel Valley? Big expensive homes on mobile home sized lots. Those small lots don’t do justice to the size of the home.

Does anyone else think the teeny lots are insane? How can you get a real tan when you have to keep all your clothes on all the time, in case the neighbor happens to look out his window? It’s crazy…

[powayseller]

246% return with Zeal 2006 options! Very impressive. Maybe I need to subscribe to the Zeal Speculator after all. But you need to buy all their options recommendations, because some lose money, so you wouldn’t want to be the buyer of that one that expired worthless.

My brother used to be a lawyer on Wall Street, and he told me that most options expire worthless, i.e. they are a money maker for the options writer, as Chris said. The same was explained by leung_lewis in the casino example.

I wrote yesterday that Zeal may have a higher rate of success due to their good research. From the links you provided, it is obviously the case. Which leads me to ask: why aren’t we all subscribing to Zeal and getting 200% returns? Their research is excellent. My only other question would be how risky their recommendations are (alpha or beta?), and if they will do just as well in the upcoming bear market.

Regarding the 90% figure cited by Chris, I find it believable. I did a google search on options, and found lots of links on the high loss rate. Here is an article:

“Options, by definition, are a wasting asset. Many first-time option investors learn this fact the hard way by watching their option contracts expire worthless. It is frustrating to have a call option expire on a Friday afternoon only to see the market rally through your strike price the following Monday or Tuesday. The vast majority of options expire worthless; most estimates are somewhere north of 85%. ”

Here’s another article about a CME options study done for a book:

“While there are certainly many viable options-buying strategies available to traders, options expiration data I obtained from the CME covering a three-year period suggests that buyers are fighting against the odds. Based on data obtained from the CME, I analyzed five major CME option markets – the S&P 500, eurodollars, Japanese yen, live cattle and Nasdaq 100 – and discovered that three out of every four options expired worthless. In fact, of put options alone, 82.6% expired worthless for these five markets.
This study analyzes data compiled by the Chicago Mercantile Exchange (CME) for a special options report prepared for this my book, Options on Futures: New Trading Strategies (Wiley & Sons), co-authored by Jonathan Lubow, vice-president of Trader’s Edge, Inc., a futures and options brokerage based in Madison, NJ. ”

[powayseller]

I read predictions that people would move back in with their parenes, several families will share a house, big houses will be split as apartment rentals (remember the college days?), and this came from a CNN article.

[powayseller]

Your credit score rises with the length of time you’ve had each card, and the amount of unused credit.

Switching cards to get the next 0% deal is not so good, because now you’ve got a new card without a history. Closing an old card is not good either, because you lose the established card that has a history.

Having $20K of credit, with only $2K on it, is actually good. This example shows that you have a high credit limit, but are using only a little bit.

I am writing this off the cuff, based on what I remember reading recently, so please don’t quote me exactly on this stuff. I wanted to point out the nuances of having established cards that are spent much below the limit.

[powayseller]

Here’s a part of the story I was referring to in my post, about the lady in Georgia.

This lady’s mortgage went up 40% since the beginning of the year, and will go up again in December. The story doesn’t tell us the value of her mortgage, only that she refinanced into an ARM in 2003.

The Texas homeowner purchased her first home in 2003 with a $141,000 mortgage, and saw her payments jump 36% earlier this year.

carlislematthew, the guy is clearly nuts. I knew about the national ARM problem, and he, as a professional, should know more than I.

I hope that everyone reading this post is clear about the nationwide fallout of the nationwide lax lending standards. The bubble areas are regional, but the lax lending was nationwide, and thus will cause housing prices to drop nationwide. Even $100K homes can be foreclosed on if the owner has an ARM. ARMs are toxic. Anyway, here are some quotes from the reuters story.

“As more hybrid adjustable rate mortgages adjust upward and housing prices dip, many Americans can’t refinance out of this squeeze. They are finding themselves trapped in too-high monthly payments, and some face foreclosures.

In 2003, Anita Britten refinanced her two-story brick cottage in Lithonia, Ga. using a hybrid adjustable rate mortgage, or ARM. Her lender reassured her that she could refinance out of the riskier loan into a traditional one when her interest rate started to reset.

Three years later, Britten can’t get a new mortgage and her monthly payment has jumped by a third in six months.

Britten’s monthly payment jumped from $1,079 to $1,340 at the beginning of this year. It rose again on June 1 by another $104 and is scheduled to increase again in December. Britten, who is also paying off student loans, went to a credit counseling service to help her avoid foreclosure.

“I’ve gotten rid of all my credit cards and I’m not supposed to refinance for another year,” she said. “All I can do is tread water right now.”

When Dora Angel of DeSoto, Texas bought her first home in 2003, she paid $141,000 for the brand new three-bedroom, two-bath home. At the time, her mortgage payment was $1,400 a month.

DeSoto originally thought that she had a fixed-rate loan. But about five months ago, she noticed that her monthly payment kicked up to $1,900. She only made the monthly payments by sacrificing payments on her credit cards, which pulled down her credit rating.

Now, DeSoto can’t continue paying $1,900 each month, but, because of her credit ranking, she doesn’t qualify for a fixed-rate mortgage.

END QUOTE

[powayseller]

ocenter – thanks for the followup. Very interesting…

lookoutbelow – interesting perspective. My attorney helped me get back my rental deposit. I don’t share your aversion to lawyers. I believe in division of labor and hiring professionals to improve my outcome.

nhamlin – good warning. I was told that nationally, all markets are cooling except Texas and North Carolina. But I’m sure their turn will come. I never could understand why people buy properties in areas they don’t know. It’s like buying a stock you know nothing about, just because you like its name. But people are doing that – buying real estate sight unseen, or they visit the town for a day first and think that gives them the necessary information. These stories usually end badly, because the seller inevitably overpays, since he doesn’t understand the local market.

[powayseller]

Here’s an even better story about a banker. The branch manager at World Savings in Rancho Bernardo, when trying to allay my concerns about keeping my CD there, told me that ARMs were nothing to worry about.

He said, “I have an adjustable rate mortgage, and my payment hasn’t gone up. Why do you say they go up?”

My reply, “That’s because you haven’t hit your adjustable period yet. Your 4% rate can go to 6%”

He responded, “But that’s only a 2% increase”.

I tried again, “It’s a 2% increase in the rate, but a 50% change in the rate. Your $2,000 payment would go to $3,000 if your rate changed from 4% to 6%.”

I think he got it. I hope he reviewed his mortgage details.

The only worse thing was the low-cut shirt worn by one of the lady tellers. Whatever happened to professionalism and competence?

[powayseller]

On the premise that Zeal’s options recommendations carry a lower risk than 90%, I took my Zeal newsletter to confirm my hypothesis. The results were opposite: the value of the calls are down, while the long positions are up.

Details for the current rate of return of the call, and the return if the stock had been purchased long on the first day of the month. Since I don’t subscribe to the Zeal Speculator, these purchase dates and prices may need adjustment.

Every stocks increased since the Zeal recommendation date. So why did the options go down?? Can someone explain this to me? Shouldn’t the options increase in value because the stock went up past the call value?

PCU
Sep 85 calls -7%
Long + 13% (2/1 $81.75, 7/3 $92.54)

CCJ
Sep 37.5 Calls -6%
Long +11% (3/1 $36.92, 7/3 $41.15)

COP
Nov 60 Calls +6%
Long + 4.3% (4/3 $64.04, 7/3 $66.82)

CHK
Jan 30 Calls – 14%
Long 0% (6/1 $30.54, 7/3 $30.74)

[powayseller]

I don’t know if this CPA is better than yours. I posted his name in this thread, so look on page 1 of this thread, the 3rd post. I like him because he’s smart, nice, and has low overhead (small office in a low-rent building next to the courthouse in El Cajon, no personal secretary), so his prices are good.

I am more surprised at the person who started this thread, who is considering a rental property, doesn’t know if he’ll save money on taxes or gets hit with the AMT tax, and is not interested in conferring with a CPA. There was a guy on another thread facing eviction because his rental home was being foreclosed, and he didn’t want to spend $200 on an attorney. I am surprised at the strong avoidance of professional help.

[powayseller]

My husband and I will come, and maybe the 3 kids (separate table) if there’s room, otherwise I won’t bring them.

[powayseller]

USAA takes non-civilians too.

Chris, I for one value your input very much. Please don’t deprive this forum of the wisdom that only you possess. You are the only trader on this forum. You are the most experienced investor, as far as I can tell. We need your investing wisdom, your balanced view, your insights. I need it.

anxvariety, I think you are on solid ground following Zeal recommendations. They are well respected by many of us on this forum. I only disagreed with your statement that it is a low risk way to increase leverage, and wanted to point out that options trading has a high risk of losing money. They are a big money maker for the options writers. I am certain the COP call option will work out for you, and I really hope it does. I would guess that Zeal options recommendations have a lower risk of expiring worthless, because the Zeal research is so good.

One more thing about posting controversial ideas. I am getting ready to make a post about the book Bubble Man. Alan Greenspan encouraged the bubble because he wanted to be liked. Schwarzenegger did the same thing when he backed off his propositions to reform education, because the teachers unions were mad at him. Greenspan and Arnold were more interested in being liked than in doing the right thing. Let’s not make their mistake. Let’s do the right thing and tell people what we see. After all, that’s the purpose of this forum.

[powayseller]

I think we should schedule around Rich. I also know fellow member hs cannot come on the 15th.

If this is fun, we can have future meetings on the first Saturday of even-numbered months, or some similar plan. Then people have enough lead time to make it.

We must have our guest of honor at the first meeting, so again I suggest that we plan our meeting around Rich’s schedule.

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