I’ll have something this afternoon on the Housing Market/Homebuilders. Meanwhile, before you get too excited about the Financials (Doug!), have a look at this chart:
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Chart courtesy of Jim Walker, Asianomics
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It suggest quite a few untoward things about the FINs.
Note: I am not implying that they should trade identically to the Homebuilders — just that its quite possible that there is still more risk in them . . .
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Source:
Economic Wave Theory
Dr. Jim Walker
Welling@Weedon, 1/25/08
http://tinyurl.com/2yunn4
The financials core business is still there. ie. People will continue to need home loans, auto loans and do their banking business with the financials. The Homebuilders have out built demand. There is a years worth of inventory out there. The core business is being slaughtered. Thats why the homebuilders are way down there.
Interesting, but not up to your usual standards Barry. Why? 1) The start date seems pretty arbitrary 2) The two data series do not seem to start at the same value 3) Chart is not log 4)Do the financials include insurance firms, etc.
Barry, your speaking in code lately or straddling the fence. This entry and the one on emerging markets pver the weekend. What are you saying here?
Ryan – “People will continue to need home loans, auto loans …”
Seems to me we heard much the same arguments about housing a couple of years ago (“people have to live somewhere, population growth will ensure prices always rise”).
That said, it should be pretty clear by now that there’s simply no way financials will be allowed to go the way of homebuilders (this time).
It seems as though we have come full circle in five years. Is this reflected in the stock prices of companies in these sectors? Not fully, yet.
I think it is still a good bet that both groups will fall more.
I have read and believe it is true, that the bottom won’t arrive until we see at least one big / surprising bankruptcy in each group.
Further, the monoline insurer situation is enough to keep me short financials. They are the Achilles’ Heel, and if that tendon is cut, the whole sector collapses.
The financials had a lot of high-margin, high-volume business based on models that are now broken.
Restoring credibility to securitized debt will mean both lower volume (because lending standards will have to return to far more conservative levels) and lower margins (because payers at all steps of the process will have to spend on the paperwork and staffing levels to vet the loans and provide transparency, rather than relying on the shortcuts of FICO scores or on ratings companies that relied on highly flawed models to hand out AAA ratings with abandon).
If, as seems to be happening, homeowners start defaulting due to negative equity instead of just due to inability to make payments, what kind of mortgages can lenders offer in an environment of declining home prices? Minimum 5% down? 10% down? 20% down?
Home prices have alot further to fall.
http://www.financialsense.com/editorials/bronson/2006/images/0907/chart10_lg.gif
Homebuilders and financials are huge value traps at this point. Perhaps not in 24 months, we’ll see.
OK, pay attention, as I am revealing the deep dark secrets of TBP:
1) The first major post of the day — usually between 6:30 and 7:30 am — is my unvarnished perspective. Its usually about some major issue which I want to further expand on
2) The 4am post is usually something I post the night before for our European readers.
3) The late morning post (chart porn or some chart) is typically something I find interesting. I may not agree with it — but it is usually something you won’t/haven’t seen in your travels;
4) If there is a daytime news release that bugs me (i.e., Housing stats are misstated) I’ll try to repsond timely.
5) In the evening, I try to cover sometthing form my other life — digital media, music, film, etc.
6) Sunday, I try to do an Apprenticed Investor type update.
“Home prices have alot further to fall.”
Shouldn’t fall as far as you imply. Scarcity raises prices, and suburban sprawl has been so horrible in recent years that mature areas are short on decent buildable lots. When I lived in the Chicago North Side, people would buy 500,000 houses as TEAR DOWNS, because convenient, close lots were scarce.
About home builders, I find the following a psychological weakness… Can’t deal with sad reality, better hide it.
“””
CITIGROUP CUTS RESEARCH POSITIONS
Citigroup’s investment-research arm cuts five positions, according to internal memo. Job losses include deputy director of research, beverage and tobacco analyst and home-building analyst, whose stocks will no longer be covered.
“””
The FED gave the banks a gift of an improvement in net interest margin of 175 basis points over the past 4 months. There’s probably more to come Wednesday. It’s hard (for me) to bet against the banks when the curve has steepened that much.
What’s fascinating is the sectors hurt most by a recession: finacials, homebuilders, retailers, autos, casual dining, consumer discretionary all got smacked by 30% to 50% in 2007, but are rallying in 2008. It suggests to me the recession has been discounted and they’re starting to look past it.
And the icing on the cake is the current Newsweek cover story titled, “Road to Recession”. How can that not mark the bottom?
Finally, all the talking heads are now coming on TV saying how much worse things are going to get economically, but my guess is they are quietly buying stocks at these discounted prices in anticpation of the recovery.
At least, that’s what I’m doing.
Bennet Sedaca has a great bubble comparison chart on buzz and banter today highlighting nasdaq 2000 homebuilders 2005 china 2008
People don’t need home and auto loans if they feel like they can’t afford to buy homes and autos. Duh.
We’re in very good financial position right now and putting off getting a new car, even though we’ll need one soon. And the financing for it is already arranged — through our credit union. Banks? Who the hell needs them?
It’s useful to acknowledge that banks may have not yet been punished enough to reflect the negative issues with their business. However, finance is the magic pixy dust that makes capitalism happen in large civilizations and therefore may rebound or experience multiple cycles while an asset class such as housing may languish for a long time.
Going forward I have no reason to rush into home builders and wait for the next bull run in the housing sector. Conversely, at some point much sooner banks will clean up their books and continue financing the monetized transactions on which our culture thrives.
Thus, banks are guaranteed to get their shit together and then start throwing money wherever profits are found, while the housing market must rise and fall based on the demand for their specific asset.
I will probably scale into banks in 2008, but I will only touch housing as a momentum play IF the sector can stage a repeat performance (which I currently doubt).
Any other thoughts on these two potential investments?
I think financials and REITs have alot further to drop …particularly after the large bounce they got last week. I continue to add to positions in SRS and SKF.
You guys took your eyes off the ball.
Here is the next ticking time bomb:
– Monolines need $200B, not $15B.
– When monolines get downgrades all their insured debt gets downgrades also.
– When their debt gets downgraded much of it must be sold, because it doesn’t meet the debt covenants in municipal and pension funds.
– Now their is a market price for these financial instruments they must be marked to MARKET on balance sheets.
– Next wave of write downs happen.
Ok, here is the 2nd ticking time bomb:
– Estimates are that housing prices drop somewhere between 21% (CME futures) to 50% (Dr. Shiller – worst case scenario).
– MANY peoples houses are become underwater (not just subprime).
– Many people mail their keys to the bank.
– Foreclosures force huge losses for banks.
– Losses kill bank margins creating additional credit crisis.
– Foreclosures create additional backlog of housing forcing prices down further …starting the cycle over again.
There are other potential time bombs out there (rising unemployment, excessive consumer debt defaults, CapEx spending dropping, etc.), but these are the most likely and the most obvious at the moment.
Both of these scenarios would further devastate financials and REITs. Lower Fed rates or a stimulus package will not solve these two issues.
Ignore them at your own peril! The market cannot price these problems yet, so it certainly has not priced them in.
we are assuming that “Mark to Market” has been taken care in the financials??
if the housing goes further down, it will take all those Level II and Level III assets with it, which means financials will have more One time writedowns.
Homebuilders…not unless they have inventory of land in good locations and they are trading for less than that inventory, and they dont have much debt.
Does anyone here employ “boring” strategies such as dollar-cost averaging? For my personal money and for the money I manage for clients, I believe a DCA strategy into REIT and Financials is quite prudent a this juncture. That way we are not picking a bottom; we are buying into weakness; and, if we are careful and patient, we will buy through the trough and continue to buy until our DCA time table has expired.
Currently, I suggest a 12-month schedule. Does anyone here expect the bottom in REIT and Financials to hit within 12 months or beyond 12 months?
Cheers to all…
No conclusion can be made with just a few years of data. What a non-sense post.
The stock price may continue to languish for a time, but how can banks really suffer when the Fed and gov’t wont let them fail. Seriously, who really thinks the Fed would allow a major institution to fail? The Fed is already looking at ways to bail out insurers.
All the campaign contributions from wall street is a form of insurance and wall street is making a claim on that insurance as I type.
The Financial Philosopher –
– The “Chicago Mercantile Exchange Case-Shiller 10 City Futures” currently bottom in 2010 down 21%.
– Commercial tends to lag residential by about 15 months (tends to be more commercial in REITs).
– Stocks tend to be about 6 months ahead of the curve.
It’s hard to predict the future (and the CS futures are lightly traded) …but it’s possible that you could be dollar cost averaging into a downtrend for 3+ years.
I would wait at least 12 months and see how it looks then… my 2 cents.
NoFate:
Thanks for the “2 cents.” It will be interesting to see what takes place. Fortunately, I limit exposure to REIT and primarily use it for diversification (and income in some cases). It’s all about managing risk and not making predictions…
Thanks again…
Today the market was just hollywood. The rest of this week will be real. Watch GS.
For those investing in SKF and SRS (the leveraged ultrashort ETFs) I have a question:
With such high volatility are these ultrashort ETFs efficient invesments? They seem to fall into a “value destruction trap” during high volatility, as explained in this SeekingAlpha post. The SA post explains the common mistaken assumption (which I had) that the ultrashort ETF (like SRS, SKF, etc) is trying to perform x2 the inverse of the index ETF (like IYR, IYF) over the long term (i.e. more than a day). Which it is not; Proshares states the performance tries to provide the x2 inverse only for each particular day (not the long term).
However, ultrashorts are also ETFs and therefore trade freely on the markets like a stock, so could this also be the reason for the wide swings/volatility? At first I thought SKF and SRS were trading at a premium compared to their index ETFs (IYF and IYR), this was a week or two ago after the financials took their recent big hit. However, while some of the volatility (big swings) seems due to mob demand/thinking, some of it might be due to the inefficient compounding described in the SA post. But I am still quite confused.
In other words I have no idea, lol. But if someone out there could drop some knowledge on these leveraged ETFs (ultrashorts, etc) I would be grateful. Basically I am concluding that they are decent short to medium term instruments, esp for those who cannot easily short on their own. But taking too many down swings can be beyond detrimental to the principal.
My thanks in advance. And even BR tried these and posted about them here.
I’ll buy the financials way before the homebuilders. Many of the major financials that have weathered the subprime meltdown still have healthy balance sheets, but the homebuilders have no end in sight to their woes.
v – Below are some observations I have about double shorts. I have a strong background in economics, but not trading so keep that in mind.
– Keep your positions in perspective. I am currently about 50% in double shorts …the rest is in cash and Berkshire B shares. Yes, I am very bearish.
– Diversify …I have positions in QID, TWM, SKF, SRS and EEV. They are strongly correlated, but some of these have done much better than others.
– Protect your principle. I bought a good percentage of these when the market was much higher and continue to add to my position. If the market suddenly does a moon shot or something the worst case is I’ll sell and break even (and then start over).
– Use technicals – Once I see a higher low or higher high I will sell immediately.
– Not Perfectly symetrical, but close – Look at the equivalent investments in the same chart over various periods of time to compare (SRS:IYR, SKF:IYF, QID:QQQQ, EEV:EEM, TWM:IWM). Sometimes they are a bit more or less than twice their index, but who cares? They use half as much of my assets and I plan to sell them as soon as we hit a real long term bottom.
– Fed Days – I used to hedge on Fed days with long positions, but have enough of a buffer to let it ride now. If the market rallies these days, I just add more to my position.
– Other Instruments – To be honest I have not taught myself enough other financial instruments to use them safely, so I stay away (at least for now). Also, I can’t use them in retirement accounts, which is half my portfolio. And if the NASDAQ drops 20% (for example) and I profit ~40% do I really care that I might have had a bit less expense using another method? Not…
I hope this helps! I don’t have the financial calculus compared to the article you site, but I think this market has a long way to fall yet, so for me it’s the only game in town. My alternative is making 4-5% in a CD.
Groty gives me hope for the future of my shorts. People who say “it is now discounted”. Yeah, who is it exactly that has enough solid information to discount this market? No one, and not even close. It is too unstable, too tightly wound, too opaque, too international, too leveraged, too dependent on margins and margin calls, and too subject to government intervention and jawboning. I think stupid money is buying the “it is priced in” idea. I am now reading daily at least one “this time will be different because so many people are short the market”. Find me $1 trillion of shorts for the financials and I will start to think that this plane won’t crater by year end.
v, I hear your pain. I am trading in my 401 so ProFunds SRS and QID are what I use. But Damn, what volatility. I think all you can do it trade them, and trade them some more.
Thanks for the comments NoFate and Street Creds. Much appreciated.
People using well-worn maxims and rules of thumb could be setting themselves up for a surprise. The situation we are facing, when you factor in the massive over-leveraging spurred on by financial innovation (alchemy) and the trap our Fed has gotten itself into, is outside of the frame of reference through which many of us view the market.
For example, many use Newsweek’s getting wise to an issue as an indication that a problem is fully out there and therefore adequately discounted by the market. That has worked in the past, but it might not if the problem being recognized takes months, perhaps years, to move from recognition to resolution. We as a society like to think that problems can be dealt with and put behind us on a quick schedule, but in the 2004-2007 period, we set some time bombs that won’t go off for a few years. That’s not something that the general public is accustomed to dealing with. Publicly traded companies are also notorious for their short-sightedness. The financials tried to make us believe they’d kitchen-sinked all their problems in Q2 2007. You hit a lot of bottoms on the way down the stairs.