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I am baffled, too, to say the least. (But my stops on lenders, builders, and QQQQ haven’t been hit, so maybe there is a last chance for the market to crack.) It wouldn’t take much to get investors out of stocks, just the equivalent of Amaranth at an equity fund. Here is another possibility what people could do if they sense bad times: stop consuming and pay back their debt. I know it’s unlikely that this is going to happen, but not impossible. It works for me, downsizing expenses and increase savings, just to make sure I have some buffer if bad times strike.

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Here just a few anectotal tips (no trading knowledge, sorry).
One is that you probably will be too scared to sell, because you think the dollar will drop further, and only gold will keep the value….-> then sell.
Other investments will also look risky, and nobody will have any confidence in stocks, even though they will sell at P/Es of 5 (solid forward earnings)…-> your chance to shift from gold into stocks, real estate, or if you trust your politicians: bonds.
People will go absolutely crazy about buying gold to protect their hard earned dollars, since they haven’t bought any gold yet. In 1980 the coin store in La Jolla had a line of 100 people waiting….-> sell your gold to some of these fanatics.
The inflation adjusted price of $850 (in 1980 dollars) is probably a good target. But use your own inflation statistics, not the government’s, haha.
If you notice that you missed the peak, e.g. after a huge price reversal, I suppose it’s better to sell, too. Better late than ride it all the way down again. (Like real-estate now with 10-20% below the peak).
Any other suggestions?

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You guys are really hard on her. I appreciate some of the information posted which I might have skipped otherwise. That said, I also felt that some of the posts wouldn’t need to be own posts and could be fitted into previous threads. E.g. there is no need to make a post “What do you think of this or that gold investment” since we already had threads about gold.
Further, some articles from the press are quite long, and maybe a link to them might be enough. Yes, the link might dissapear one day, but it’s probably irrelevant by then anyways. If it’s just a link, it would also easier fit onto the bottom of other threads, and one could skip over it. To quote the punchlines from certain articles would be great though.
There could be a thread called “NAR news releases” or similar for this kind of messages, if they are similar in content, i.e. that NAR provides a bullish outlook. (what’s new, haha)

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I am with you on the QQQQ Jan 2008 puts. I wrote some on the other thread, if you saw it.

I think your analysis is fairly good. I just want to add, that the Nasdaq might drop 10% earlier than by Jan 2008, and then you could take even higher profit since there is premium left in your option. The premium generally shrinks a lot when the market moves in your direction, so it is not going to be much. But if volatility picks up, premiums could be slightly higher.

Also, even if you don’t want to take profits after a 10% drop, you can still write another option for Jan 2008 for a 20% drop (another 9% drop), at which you would have to take profit then. This second option would give you a credit of roughly about $1.50 (depending on time left and volatility), so if your original put was $3.50, you now can only lose $2.00. But you can also only make your stated return for the 20% drop (+$1.50) and not more.

Anyways, my point is that there are follow-up decisions possible, and the profit situation depends on the time. That’s why people say, for options you need a good timing.

I think ChrisJ wouldn’t short here, but Lance Lewis talked about it on Oct 1st. (http://www.lewiscapital.net)

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See my previous post. Amen.

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I think regardless of quoted CPI numbers, most people agree that prices have doubled in the last ten years (gasoline, electricity, rents/houses, healthcare, education). That’s a 7.2% annual increase during a time of supposedly low inflation. Sure, some items have gone down, e.g. produced in China, but their quality, too. Computers have gone down a lot, but I am not using it for much more than I already did in 1996 when I got internet through Time Warner Cable. Rather I am upset, that I need a new computer every two years, because the software cloggs up everything, and it wastes more of my time.
So, going forward it might be more than a 7.2% per year increase. In another ten years, everyone would have to use his net salary to cover the rent, if incomes continue to lag. Denial or not, it can’t continue that long before nobody won’t be buying anything anymore. (The cornerstone of the US economy)

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Yes, you are right Poway. That’s why we have to change this website then into “Southern California Housing Phobia News and Analysis”, and remind ourselves to buy instead of renting, haha.

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Yes, it sounds like a good theory, and they will do all those things depending on where they face the least pressure. But what happens if the dollar drops under 80 and all commodities will end their correction and have another run? Then the government will suddenly not do much of any of those things. Partly, because then people don’t want them to do anything except keep prices down. And you can’t keep prices down by printing money.

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So that just disproves David Leerah’s thesis that we have reached the bottom. There will always be people wanting to buy until we have reached the bottom. Then nobody will want to buy, and that’s why prices will be low. NOBODY will want to buy, because there will be all kinds of horror stories and all kinds of fears, interest rates might be high, people will think prices will go lower, and nobody will be in the mood for buying. Except me, I will be buying. I won’t be in the mood either, I guarantee you that. I am not in the mood of buying anything now either. But I will hold my nose and buy, because one has to put one’s money somewhere, and if it happens that mortgage/rent is 0.9, I will buy, knowing that it is probably a good deal.

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I saw others criticize you (PS) on this high assumption of defaults of ARMs (e.g. 95%). Am I correct, that it doesn’t depend only on if they can meet the payment shock, but also how their house is valued. So for the ones that bought last, the amount might be huge by what they will be under water. So even if they can barely scratch together the payments, e.g. by taking more debt elsewhere, if their condo has a market value of $350,000 and they have a $700,000 loan, they might just call it quits. How does this depend on the type of loan? In which case can they walk away (and just get bad credit), or when are they still liable for paying back part of it? (Sorry to ask such a basic question that probably everyone on this forum knows.)

[rseiser]

I think this is just how markets are. People predict the future, but they also predict what other people do. So when one person starts to buy, some others might see that and just buy, because there could be more guys like the first one buying. And then of course you have people like Cramer who declare that the homebuilders are great buys, because “they have stopped going down”. (He was right, but for how much longer….?)
Clearly, not everyone in the universe thinks that housing prices and home-builders will go down. Some people could be totally stupid, too. There are already plenty of people declaring that this is the bottom, we had our correction, and now it will recover again. There are also people who look at static numbers, and they just buy when P/Es are 6.
This is just how markets are, otherwise we would drop every single day, and no day would be higher than the previous until the bottom is reached. This is obviously not how it works.
Anyways, I declared this to be the stock market top in my other post. (Note, how slick I linked to a particular post on a follow-up page, using page and comment number.) So let’s see what happens.

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Poway, you really outdid yourself with a great post. Yes, I agree it is a very important question. As for the answer, I have no clue. But here is something I said earlier in the year about the inflation/deflation debate, and what the government will do. I think all things considered the government still pitches to the voters. They will probably try to please as many as they can, and on the side pocket some money for themselves and their cronies, whatever they can get away with. So, look at the overall pressures and try to find which way they point. If we have a universal credit contraction, and everybody is in debt, the government might just lower interest rates and print money. But the forces in commodities might point up strongly, and also there are many people (retiring baby-boomers) who are not in debt, so this might limit the government’s ambitions. I can’t really see the government do anything to keep the housing market or stock market at the present level if oil goes to $100 and gold to $1000. Why would they anger retirees? But they might do something if housing drops 60% and gold only rises 20%. So basically, my answer would be that there will still be pain for homeowners, and there can still money be made by contrarians. But when the pain gets too large, or a large group of people or banks are headed for zero, the government will probably bail them out to prevent that. But it might not matter to me so much since I really don’t care if say LEND goes from $37 to $10 or from $37 to $0. I am not betting on the last $10, hoping that other opportunities will arise at that point. But I agree, it is an interesting and important question. And after all, if a stock trades at $1, it does make a big difference if it goes to $0 or to $10. This is actually where some great investors made the big money. So we have some time to answer this question. Maybe by then we know if we should risk getting long on certain $1 stocks.

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Here is my limited knowledge, but you might post the question on Cafe Hayek, Mises Institute, or some other Austrian Economist forum.

First of all, a wise economist once said: “Nothing in economics is that simple that it can be explained in one sentence, except this sentence”.

Regarding the VAT, there seem to be a lot of moving parts. First, I would distinguish between an internal tax on consumption (i.e. VAT, sales tax) and an external tariff. In the case of the VAT you are taxed whatever you consume, while in the tariff your are only taxed if you consume some other country’s product. I think history has shown that the former seems to work ok, while tariffs have caused more problems. I assume that tariffs don’t work, since it just prevents the division of labor. If I make a tariff against Middle-east oil and try to use more expensive domestic oil (from under the Rockies and offshore) what’s the point? It’s probably better to use Middle-east oil and sell them something we are good at (e.g. computer chips). Here, everybody benefits.
The VAT, however, could be justified by the Austrian motto: “First, you have to produce, before you can consume.”, and that supply and demand are not exactly symmetric (demand is infinite, but supply isn’t). So a VAT would steer people a little away from borrowing to consume before they have produced anything. Not sure, if that makes it worth by itself, but I think a VAT (or sales tax) could be useful if other people get hurt too by someone’s consumption. If you buy as much stuff as you want, you probably create a lot of pollution and waste that other people have to deal with in one way or the other without getting compensated.

Back to the original question.
I don’t see how the Japanese example would constitute a tariff. It doesn’t earn Toyota more on a car that they export vs. sell in Japan. All it does is to make the exported car cost 2,000,000 Yen, and the car sold in Japan costs 2,000,000 + 200,000 Yen, if VAT was 10%. (Toyota gets 2,000,000 either way.) So a guy driving in Japan has to pay 200,000 VAT, and a guy in the US not. So what? That doesn’t make anybody chose a Japanese car over an American car. It just makes people in Japan a little more cautious in whatever they consume. And if the government receives a lot of VAT, they can lower income-taxes or provide infrastructure or education (as long as that doesn’t get squandered). Or they could cover some of their deficit and print less money (something the US might want to think about, haha).

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I think it is impossible to recommend anything on the short side without a whole disclaimer and operating manual included. It depends on so many things. First of all on the offsetting long positions, then on the total assets one has, and of course the risk tolerance. Also, any stop can depend on time and cicumstances as well as price, and I am not a good trader capable of using stops. Put options more or less provide an automatic stop, since if you are wrong, you basically lose whatever you put down.
…So I don’t think there is any answer fitting all.

I can only tell you what I am doing and what I think of doing, but don’t blame me if it doesn’t work for you. I myself have a huge tolerance for risk, because I believe in it, and if I am wrong I am willing to pay the price. I have been too often right in the past. But I don’t know anybody else who would short that much except maybe Bill Fleckenstein.

Most of my shorts are QQQQ, CLM, and homebuilders, and lenders, pretty much those dicussed here. I am probably the same amount long in precious metals.
Just to think out loud, these are the things going through my head:
For the short-term top, one could risk an Oct QQQQ put, and if it works use the gains to extend it later. You wouldn’t have to worry about a stop, since your money is gone automatically if you are wrong. I have never bought front month, but I am thinking of Oct 2006 $40 puts for $0.30 if I can get them tomorrow.
For the longer term, a QQQQ Jan 2008 put looks like a steal (Strike prices $40-$45). If the Nasdaq isn’t lower by 2008, it might not gonna happen, but if it does drop now, it might take two years before everything is over.
There are more experienced people for stop losses, but what’s wrong with 2300 on the Nasdaq, $37 for LEND, $420 for GOOG, $62 for MBI. Those would be the stop-losses I would think of. Anybody any suggestions?
Other than that I would just buy in-the-money puts on the housing complex (mid 2007), and just swallow the loss if it doesn’t work out.

Again, this is what I do with my money only. For my friends and family I use the same long-only positions as those of my investment club. (user: guest, password: guest, to see all positions)

[rseiser]

I just re-entered all of my short positions in the home-builders and lenders (whatever I covered before). I think we are at a time in history, where everything comes together, and if one ever wanted to short anything that’s gonna be it. Is tomorrow the proverbial top for many years to come? Maybe I am wrong, and we have another rally between here and year end, and the Dow makes new highs. But after a relentless rally of 10% on the Nasdaq, in the face of worsening news, real-estate roll-over, quarter end mark-ups, start of earnings season, absurd valuations, cracks in hedge-funds and derivatives,… I believe this could be the end of the counter-trend rally.
I don’t want to recommend anything here, but just stating what I do. Should you decide to short any stocks yourself I urge you to read my primer about shorting.

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