Hedging Real Estate

This has been on my mind for a while: Two ways to hedge against or reduce the potential for problems in a tough market, today and for the future.

#1) Buy something that you can improve.

Not a disaster, but a home that is priced right for the condition of the home.

If you are a do-it-yourselfer, have some home improvement skills and don’t necessarily mind some effort and sore muscles, locate a home that may need some improving.

Benefits of improving a home:

  • saving tens of thousands of dollars over time
  • gaining more skills
  • obtaining pride of ownership
  • realizing sweat equity
  • making improvements that suit your style and tastes

Challenges:

  • dedicating enough time to do it right (been there)
  • costly mistakes (been there)
  • poor budgeting & planning (no comment)
  • marital tension (been there, been there again, and will in the future).
  • it costs more than you think (can’t discuss this on a public blog due to potential for more marital fireworks, please forgive).
  • throwing in the towel and hiring contractors (never done this, but have threatened so by yelling curses out towards the sky or at snickering neighbors peering through their kitchen window as I work in the mud and rain; cursing particularly after nearly cutting off my left forefinger and middle finger (Dr. said very important to save that finger for I-5 freeway discussions with other motorists). Note to self: place blade onto drywall, not human flesh. Props to Swedish Med. Ctr. in Ballard. I digress.)

The advantages of sweat equity really do outweigh the challenges. Patience and perseverance will pay off.

#2) Buy the right location with the end game in mind (ie, life happens, so you may have to move).

Because housing is not necessarily a quick sale, as many are finding today, it is important to never lose “location” in the midst of your search.

Although location has been an cliche for so long, it really has lasted the test of time. Location means a lot of different things to people. It could mean reasonably close to employment, school or school district. Perhaps you prefer a newer development.

So, when the time is right for you to buy your first home or move up to a home that meets your needs today, then don’t be afraid of being patient enough to find the right house in the right location and getting your hands a little dirty. It can pay off handsomely and may put you in the drivers seat through market ups and downs.

Bonus: #3) Invest in Case-Shiller Index Hedge Fund

Bonus #4) Rent

-S-Crow

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About S-Crow

"S-Crow" (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.

63 comments:

  1. 1
    budbrad says:

    #5 SHORT THE COMPANIES LEVERAGED TO HOUSING Months ago when everyone here was decrying the rise in GOOG and poking fun at the real estate market, I wrote a comment here telling people to buy PUT options on WM, CFC and MBI. “Shooting fish in a barrel” I said. It was true.

    In August, a January put on Countrywide with a strike price of 5 cost a thin nickel. Today, it traded at $1.20. That’s a 2300% gain over a few months.

    In the past year, I’ve traded on WCI (bankrupted just today), Impac (bankrupt last fall), KB Homes, as well as the others above.

    There’s still money to be made here. We all know the housing crisis hasn’t even started.

  2. 2
    S-Crow says:

    budbrad,

    Can you send me a resource(s) for understanding PUT options/shorting for the average reader/investor.- Thx.

  3. 3
    b says:

    S-Crow,

    The easiest way to is buy short/ultrashort ETFs, which trade just like a normal stock. I have invested in SRS and SKF since about 6 months ago and I am up considerably on them. They are not for the weak hearted, however.

  4. 4
    Lionel says:

    budbrad, what ‘s your take on the Canadian banks as short targets? It seems they’d be just as vulnerable to a soon-to-be declining housing market.

  5. 5
    Ray Pepper says:

    So budbrad whats your call coming outta the gates on CFC @ 5.12, WM 12.34, NFI 2.99..WB 35.07..more bombs to drop? getting tempting…I went long VG at 1.73 and may have nailed the press release of 1 bill in rev for 2009. Its been beaten to a pulp. Still long 30k on EGHT at 1.00. and CHTR 21k @ 1.00.. I think all will rise in coming months. Thoughts? Like Voip? Chtr? at these levels. ??

    BofA could have used you on the CFC at 18.00.

  6. 6
    Grubbie says:

    Ah finally somebody mentioned SRS and SKF…

    I just opened up my first retirement account and was thinking of starting with those two stocks. Not sure which one to start with, but it will be those two EFT’s.

    Have you just been holding them or have you been buying and selling to try to time the market changes with them?

  7. 7
    b says:

    Grubbie,
    I am simply long on them for the time being, I think we have a ways to go and this is play money so I don’t really care about trying to day trade them. However they are so volatile you could probably make a good amount if you have consistant timing.

  8. 8
    redmondjp says:

    You are so right on the ups and downs of sweat equity! I’m right there, doing almost everything myself, but have the flooring contractors in this week to put Pergo flooring in all three bedrooms & hallway while I put new vinyl down in the bathroom (no snarky comments, I’m too white trash for tile plus I hate installing and cleaning it). New baby will be here ANY DAY. Hopefully AFTER flooring and trim have been installed, so we can have a few items of furniture moved into those rooms (our bed, dressers, crib, changing table, rocker, etc). Stress? Heh heh heh, uh, well, it’s 11:30pm and I’m going to cut the vinyl tonight before going to bed.

  9. 9
    Moe Ronn - Realitor says:

    Can someone, anyone, explain to me how making money investing in stocks is a contribution to society? Well, I should clarify. I know young companies need investment capital. But, let’s say I buy MSFT stock. I’m not likely actually buying it from MSFT, I’m buying from some other Goon (like maybe Ray) who likely bought lower than I, making a profit. How does this help MSFT? How does this create equitable value for society? I just don’t really get. And, I’m a 4.0 student in ecomomics so far. Granted, it’s not my major, but I’m not a dolt.

  10. 10
    Moe Ronn - Realitor says:

    I guess it just seems like gambling, and I see no societal value in that either. Who benefits if a poker player wins the stakes? Or, who really benefits if the house takes it all, other than the house of course?

  11. 11
    Moe Ronn - Realitor® says:

    Bah!

  12. 12

    #5) Build your own house
    If you can find a good land, land prices are down too. ready to build lot or subdivide which may take a while and you need to know county/state regulations. And sure the benefits and challenges mentioned in #1 comes into play.

  13. 13
    Buceri says:

    Basically Moe; when I made a satisfactory profit on MSFT, I sell it to you (you think the company will grow further and make more money). MSFT uses the money to expand and creates jobs (contribution to society). If everyone sells the stock, the company has to liquidate all its assets as the value of the stock loses ground, eventually going belly up.
    Countrywide has 3 excellent years and hired a ton of people; today they are collapsing (nobody wants to buy their stock) and they are laying off.
    Someone might have an easier to follow explanation.

  14. 14
    stephen says:

    “We all know the housing crisis hasn’t even started.”

    I would personally call it a credit/housing crisis. You mean it has not strongly affected you yet. Don’t get that confused. This crisis started over a year ago and really picked up steam in August. If has been far reaching and it has been severe. It damn near brought the world’s financial markets to it’s knees and at this point I would guess that the job loss in totality for the crisis is now over a million. Because so much of the hit was retirement/pension funds the effects of this ‘crisis’ will be felt for sometime.
    Yeah, it’s started :-)

  15. 15
    Moe Ronn - Realitor® says:

    Buceri,

    I can understand that a young company needs to sell stock to raise capital. However, once the company sells a share to you, I do not see how they benefit from you making a profit in selling that share to me, ie, what value is produced in secondary, and subsequent sale of stock?

  16. 16
    NotaBull says:

    “Basically Moe; when I made a satisfactory profit on MSFT, I sell it to you (you think the company will grow further and make more money). MSFT uses the money to expand and creates jobs (contribution to society).”

    What money? Microsoft don’t get a cut of the transaction. Any profit from the transaction goes to the seller. Microsoft got the money when they originally issued the shares, and then subsequently when they re-issue new shares, although I’m not sure how often that occurs, to be honest.

    The thing I like about public companies is that you get a right to peek into the finances, along with the rest of the world. The thing I don’t like about it is that the ownership of the company is typically (but not in MSFT’s case) completely divorced from the people who run it. So the executives have an incentive to pump up the stock price in the short term (while they’re there!) at the expense of the future health of the company. Bonuses! Options!!

  17. 17
    Hyperbola says:

    Actually, public companies issue new shares all the time. The most common form of this is stock grants and option exercises for employees. They’re a significant chunk of compensation for most public companies. And the number of shares they have to issue to be competitive depends on the price of the stock. (In general, a stock that is performing well tends to get diluted less by recent grants/options.)

    So in that very indirect sense, Microsoft does get a cut of action on the stock. And it indirectly affects their bottom line because employees tend to tolerate lower salaries when the stock is making them lots of money. Conversely, when the stock performs poorly, employees tend to demand higher salaries.

  18. 18
    notabull says:

    “Actually, public companies issue new shares all the time. The most common form of this is stock grants and option exercises for employees. ”

    That’s a very good point. In fact, I’m waiting for some of mine to vest so I can sell the darn things before the company tanks even more! :)

  19. 19
    b says:

    Moe Ronn – Realitor said,
    I guess it just seems like gambling, and I see no societal value in that either.

    It is gambling and there is little societal value. But there are relatively few services or things these days that do actually bring societal value, the rest are just for the hell of it.

  20. 20
    CalifornianWhoBoughtRE says:

    The value of investing is clear. Investors provide funding to a company in exchange for a share of the company’s equity. The value of the equity in the company reflects the market value of the company. Now assume that equity investors could invest in a comapy but were unable to ever sell their equity share to realize a gain. The only way to realize your gain would be for equity holders to vote to liquidate the assets of the company i.e. shut down the company, sell the assets and fire all employee (may make sense for a company with tangible assets but not for one based on intellctual capital) – clearly this action contributes nothing to society. So, if you do not allow investors to realize gains why would they invest in any company. You would have no publically owned companies in the US. Any company would be funded by debt or self funded. The optimum way to capitalize a company is a mix of debt and equity. So no equity investing would result in a higher cost of borrowing.

    So the results of no equity investing:-

    * Higher cost of capital so lower economic prodivity and reduced US competitiveness
    * No equity funded companies so how do you support your family if you can’t work at GE, microsoft, boeing, citibank, Motorola……..i.e. huge issue for intellectual capital based business as no bank will lend money unless it is backed by assets
    * No way to fund high risk business and capitalize on growth opportunities.

    I would argue that equity investing generates enormous benefits for society…things like jobs, opportunity, investment returns, taxes………

    That’s not to say the american version of capitalism does not have its faults but that is a different debate.

  21. 21
    disbelief says:

    CalifornianWhoBoughtRE, excellent post! This is a great summation of the “societal benefits” of investment/stock market. But I would argue that the “faults” of our system of capitalism are not “a different story”. The same mechanism that enables companies to grow and provide employment provides an incentive to act in a way that is contrary to the interests of those employed by the company- so unfortunately many of the benefits are canceled out. The stock market and capitalism is simply amoral – it does not have a “societal purpose”, only a practical one :-)

  22. 22
    vboring says:

    no thanks to the sweat equity home remodelling.

    i value my fingers and my time too much to consider that sort of work worthwhile.

    if you consider it a hobby, then it will always work out fine.

    but, if you keep track of all of your material and time inputs, you might find that your income/hr is not an amount you would be willing to work for.

  23. 23
    Q says:

    Day trading doesn’t really have that much value to companies except for brokerages, because they get to collect fees for trades. You can search out Warren Buffet’s comments on this, which are far better than mine.

  24. 24

    Moe,
    Here’s the societal value in stock market investing ( ok, stretching it a bit):
    Let’s say you are the CEO of Transform Corporation, a company that tears down tract developments and converts them into organic farmland. you have your IPO at ten dollars a share. Often in the life of a company, especially a growing company, the company will have secondary offerings, issuing more shares. The
    secondary offering price will be based on the current share price of the company, so while the company’s operating revenue is not affected by the share price, if they want to ” go back to the trough” and offer more shares, it’s to their benefit to have a higher share price, for that money goes to the company and can be used for expansion, or buying out competitors, or giving big bonuses to the CEO.
    How does it benefit society? If your company is in the business of importing lead toys from China or expanding the subprime industry, it doesn’t. But if you’re tearing down tract homes to grow organic carrots, or creating biodiesel from algae, it could be seen as a Win Win. The stock price is high, they get a bunch of $ in a secondary offering, allowing them to dominate the algae biodiesel industry, we are weaned from imported oil,and you get rich as the stock price rises.

  25. 25
    Nolaguy says:

    re: short ETF’s

    I like QID which is an inverse of the NASDAQ-100. It gets decent volume, so it’s a little easier to get out of if it’s going the wrong way…

  26. 26
    TJ_98370 says:

    Maybe a good hedge would be to invest in sin stocks? :)

    VICEX

  27. 27
    Matthew says:

    I currently own – SRS, SDS, SKF, QID

  28. 28
    Joel says:

    FYI, QID is double inverse. I was in QID for a bit, but it went nowhere so I moved it to SKF. Now though, it looks like the Qs are finally starting to crack.

  29. 29
    WestSideBilly says:

    disbelief nailed it. The stock market offers no societal benefit. It’s an amoral tool that allows companies to raise no-strings-attached capital, and in turn allows the providers of the capital to benefit financially if the company uses their new capital well. It’s more efficient than private lending and distributes risk much more widely . If there’s a benefit to society, it’s that a good stock market enables a vibrant economy whereas relying on private investing leads to a stagnant (and corrupt) economy. The flipside, of course, is that it also demands the overseers of the company do everything possible to maximize returns to the owners (shareholders), regardless of morality.

    It is NOT gambling, however. Gambling games always have a hedge against the gambler – in other words, in the long run the gambler always loses some percentage of his initial funds. The stock market is nearly the opposite – the stock market almost guarantees a positive ROI in the long run. Taken with a short perspective, it’s possible to win a lot gambling (win the lotto, hit the jackpot, win the WSOP) and lose a lot investing (buying 10,000 shares of CFC in May, investing in Pets.com), but over time the gambler will always lose and the investor will (almost) always win. A diverse array of stocks chosen prudently (low P/E, good cash balance, good debt:earnings, steady earnings growth, etc) will beat inflation consistently. Low risk, relatively low reward. Shorting stocks (even obvious ones like WM and CFC), buying into IPOs, and other aspects of the stock market have higher risk but also higher reward. In that sense they are closer to gambling.

  30. 30
    Marc says:

    Regarding the subject matter of S-Crow’s post and his previous post (Rates below 5.5% 30 yr. fixed) describing now as an “exceptional time” to “purchase or refinance with rates this sweet,” you might want to be careful with such bullish talk about the Seattle housing market. Someone might accuse you of not believing in pink ponies and suggest that you be banished from the Bubble.

    That said, I agree with your sentiment. I bought last August (gasp!!) and took advantage of hedge options #1 and # 2 as well as the one suggested by Amarjit Sandhu above (build your own house). I bought a house very near work that has a full unfinished basement. I’ll be able to add another bedroom, create a hometheater/gameroom, and reno the bath. This increase in overall square footage and amenities should significantly increase my resale value. Plus the seller had no idea he was sitting on a second buildable lot. I applied in November and received my second tax parcel number a few days before Christmas. Happy days!!

    Thank you Zillow!

  31. 31
    Angie says:

    no thanks to the sweat equity home remodelling.

    i value my fingers and my time too much to consider that sort of work worthwhile.

    And here, my friends, we have the attitude that kept flippers in business for so long (and may well again).

    A freshly-spruced-up house is always going to attract more attention—and hence, more bids and a higher price—than one that’s dated and could use some fresh paint.

    Your hourly wage in doing it yourself may not work out to much, but the value of your house sure can dramatically improve. Most home improvements aren’t that hard, and the changes you make can be really dramatic and gratifying. (Want to see what I did last spring to my bathroom? All the finish work is long since done, btw…)

    Sweat equity sure has worked for us. Twice!

  32. 32
    Erik says:

    Buying stocks from another investor absolutely does benefit the company, even though you aren’t feeding cash directly to the company. This is because (as Ira pointed out) your support of share prices increases the revenues that the firm will get from later issues, but also because it supports the resale market for stocks in general, without which firms would find it more difficult to raise funds in the first place.

    To put it another way, willingness to buy a shares in a company would be greatly diminished if the prospective purchasers new that there was no secondary market for them to sell those shares in. Dividends would then be the only benefit to share ownership, stocks would be illiquid.

  33. 33
    jon says:

    Buying stocks also isn’t in any sense wasting money, because it just goes to another investor who can then use it in some other way. So the net effect on society is simply the signal it sends to the company and others what types of results investors are looking for. That motivates them for future risk and rewards the management for their accomplishments.

  34. 34
    brettro says:

    Like some others, I’m currently in SRS and SDD.

  35. 35
    CalifornianWhoBoughtRE says:

    disbelief, the issue is that in any society there needs to be a balance between capitalism generating returns and it’s role im making sociaety a better place. The old school Europe was too extreme in leaning towards societal benefits (this is changing rapidly due to globalization and lack of competitiveness) while the USA leans towards capitalism with virtually no balance against its repsonsibility to society. In other words, I believe US capitalism is as cold, heartless and uncaring as economic theory is. Just look at the obscene compensation most US executives make as well as the huge rations of executive to average employee compensation at every US corporation.

    But, I argue it is society’s role to force a better balance between capitalism and a moral responsibility it has to bettering society not the role of the capital markets.

  36. 36
    uptown says:

    Moe,

    The stock market is a ‘market’ just like any other…it needs buyers and sellers to exist. As you will see with the housing market; if people stop buying, prices fall. Day Traders and their like, keep the stock market going when others want to hide; just as ‘vulture investors’ are starting to jump in and set prices in the national real estate market. Check out today’s http://thehousingbubbleblog.com/?p=3995 for an update on this process.

  37. 37
    michael says:

    Capitalism and Socialism both suffer from the same problems. I’ve never understood why so many people argue that a group of wealthy socialist bearocrats is going to act any more morally than a group of wealthy capitalists. Some institutions work far better under socialism and some work better under a capitalist model. Who anyone would want a capitalist fire department? Can you imagine having to take bids or being at the mercy of market forces when your house is burning down. Can you imagine CitiGroup running the fire department. They would take every penny you had before they ever showed up.

    Would you want a Capitalist police force? Where officers are part of companies that are paid to inforce the law. The scariest thing I’ve seen in years is the private army that the Rebublican party deploys in the US. Anyone that has seen these Blackwater a**holes running around US streets with assault rifles really needs to question Rebublican Capitalism.

    Equally a centrally planned (Socialist) economy for something like restaurants would produce a land where everything tasted like your elementary school lunch. All of our millionaires would be the lunch ladies who could take and resell the best foods as they did in the soviet union.

    The choice between what markets work best under socialist or a capitalist model has to do with the opportunity of the consumer. Some industries naturally leave the consumer with little or no opportunity such as Fire fighting, Health Care, or education. I don’t know a lot of six year olds who can pull themselves up by the boot straps! Industries such as restauraunts, industrial parts or consumer electronics thrive in a Capitalist model because the consumer has so much possibility.

  38. 38
    Buceri says:

    BOA in talks to buy Countrywide –
    “Countrywide shares jumped 65% to $8.43 on the news. Bank of America was up 1.6% to $39.34.”

    Anyone shorting CFC?

  39. 39
    disbelief says:

    Admittedly, I’m somewhat lacking when it comes to in-depth stock market knowledge. But I would imagine that even shorting RE stocks (while it seems a pretty safe bet) has its limitations if the the market becomes to bearish, no?

  40. 40
    Billy Sunday says:

    BudBrad said: In August, a January put on Countrywide with a strike price of 5 cost a thin nickel. Today, it traded at $1.20. That’s a 2300% gain over a few months.

    Jan $5 Puts on CFC are trading at 28 cents right now, on a WSJ report that “Bank of America is in advanced talks” to buy CFC. The value of these Jan Puts could go to zero if a deal materializes in the next week.

    Trading options is risky, and if you don’t know what you’re doing can cost you.

  41. 41
    disbelief says:

    For clarification, above I’m referring to the ability of a broker to “locate” a stock, and the possibility that stocks may be “called away” from you to be sold.

  42. 42
    budbrad says:

    Actually, Billy Sunday, the value of those options will go to zero next week. I guarantee it with 100% certainty. How do I know this?

    They expire next week.

  43. 43
    Runs With Scissors says:

    The big three have looked great over the past few years: gold, silver, and platinum; and are tax free to buy and sell as well :-)

  44. 44
    Moe Ronn - Realitor® says:

    Alright, thanks for the input on that investment question. I would have to agree that in the end, without keen values of social responsibilty, capitalism and the stock market in general are detremental to the welfare of the common member of the body politic. And, I would also propose this about stocks. Perhaps it would be best if any investor of a company’s stock could only realize a profit by sharing in a small percentage of the company’s actual profits. I guess that’s dividends, but it still seems like the only fair way in the long run. Speculation can cause great damage to many while benefiting the few. How many of you have paid attention to the growing gap between the wealthy and middle class? The middle class is shrinking, and poor are growing as fast the ranks of the well-to-do. This is not good for the children of our children. We’ve got this culture of “Hooray for me, and screw you!”

  45. 45
    Moe Ronn - Realitor® says:

    Michael, thanks for your explaination. I share most of your sentiments there. However, in this country health care is a capitalist endeavor. That’s why we have skyrocketing costs of services and insurance premiums. Sure, the quality might not be as high in a social health care model, but at least most everyone has access to basic care, which might lead to a lot of prevention of other more complex ailments which, of course, cost more to treat and that is usually only obtainable by those fortunate to have lots of money or good insurance. Doesn’t it seem like a bit of a scam?

  46. 46
    Matthew says:

    I’m not seeing any available shares to short of CFC right now on thinkorswim. PUTs are looking very cheap however.

    This deal isn’t going to go through, or if it does, its not what people think. CFC is not going to remain in tact. BofA will disband everything but the servicing arm of CFC. Everything else will be laid to waste.

  47. 47
    Matthew says:

    Budbrad is correct, OPEX is Jan 19th, not much time left on the clock to make money on any Jan puts.

  48. 48
    WestSideBilly says:

    As Matthew said, CFC won’t remain intact if BoA buys it. There’s no way BoA would be interested in CFC’s entire structure (read: massive delinquency/foreclosure risk). Of course BoA already owns a healthy share (15-20%?) of CFC so this may be a move to protect that investment.

    Also, Bernake is talking like the Fed will lower rates another quarter % in the coming weeks.

  49. 49
    Grape Ape says:

    Hey Runs With Scissors: You might want to check with a tax advisor on the tax consequences of buying & selling precious metals because there are some.

  50. 50
    Grape Ape says:

    I’m too lazy to look it up, but I’m pretty sure that even MSFT does not have enough cash to buy back all of its outstanding stock. So stockholders are still providing the capital it needs to keep the doors open and create jobs.

  51. 51
    Moe Ronn - Realitor® says:

    Grape Ape, I do not quite understand the implecations there. Let’s say, for example, that MSFT does not pay dividends. Then why should they even care what the price of their stock it. Someone else owns it, they are not forced to buy it back. The only real reason would be to get back major hold control of the company, and Bill never let that go as far I know.

  52. 52
    notabull says:

    “Also, Bernake is talking like the Fed will lower rates another quarter % in the coming weeks.”

    It seems to *me* like he’s talking like he’s going to drop it another half a point. This all assumes that some awesome good news isn’t going to come out in the interim (unlikely). Part of his job is to pretend to care about inflation, but if you ultimately believe we’re headed for a recession (which Bernanke now seems to) then the problem in the future is *deflation*, and not inflation. Given that interest rate cuts are delayed in their impact, I think the feds are trying to hit the drop in demand (and associated deflationary pressure) on the nose with solid interest rate cuts he delivered several months prior (i.e. now).

  53. 53
    what goes up comes down says:

    yeah who cares if the dollar is worthless, our rates will go down and oil will go up to account for the weakness in the dollar — what a great cycle. The fed doesn’t get it you can’t cut your way out of this pain — you have to take your medicine — but instead the Fed will cut and keep trying to string the Junkie = US consumer along.

  54. 54
    notabull says:

    “yeah who cares if the dollar is worthless, our rates will go down and oil will go up to account for the weakness in the dollar — what a great cycle.”

    If they get it right (which I honestly think is unlikely) the fall in overall consumer demand will reduce demand for oil and hence reduce the price, not increase it. Given that the world won’t decouple from the US, especially China, their oil use will drop too. As inflationary pressures subside, other banks (ECB for example) will be able to reduce rates, thereby decreasing further the downward pressure on the dollar.

    The dollar was at 2.09 bucks a pound a few months back. Then the UK bank started reducing rates, and now we’re at 1.96. Quite a difference.

    IMO, as the rest of the world lowers rates due to the likely world slow-down, the downward pressure on the dollar will subside. We’ll all be in the toilet, but it will be a shared toilet.

    Whether this scenario will occur or not is hard to predict, but I believe this is what they’re aiming for. Note that it’s not a “rosy” scenario at all as this assumes a recession or significant growth slow-down.

  55. 55
    Michal says:

    I have a problem with the recommendations to hedge the real estate via financial markets. All of the hedging options that were proposed here are flawed because they can only work if we assume the financial markets do not expect a housing downturn. But the financial markets DO expect a housing downturn, and the only way the hedges will work is if the downturn is deeper than the financial markets expect.

    Let’s take a look at the example with Case/Shiller Index. The contracts for the national index for Q4 2009 (CUSX09.CME) are trading at 183, while the current value of the index is around 210. That means the markets expect the national prices to fall by almost 10% by the end of 2009, and if you short these futures, the only way to make money is if prices fall by more than that. That’s the same as saying “I accept that the price of my house will fall 10% but I want to insure myself against a larger drop in price”.

    The same applies to shorting or buying puts in stocks, except that there is less transparency in price. The current stock prices already reflect a deep crisis and they will fall only if the crisis deepens more. If the crisis turns out less bad the stocks may well rise and shorts and puts will lose money. When buying puts you have to expect that you will lose 100% of your investment, and when shorting, the potential losses are unlimited.

    I have quite a bit of investing experience, including options, but I do not pretend that I can “beat” this market and I am not taking any short positions at this time. The short and ultrashort funds do seem attractive as a way of shorting this market, though. They provide a way to contain potential losses, and they are run by managers who have more experience and time than me to navigate this market, so I will consider investing via these funds.

  56. 56
    Buceri says:

    I think the fed has never faced something like this. The amount of bad news this morning is pretty….bad.

    Oil is traded in dollars; as the dollar looses value, the exporting countries loose revenue. A slight cut in production (cleaning, terrorism, strike, a microphone close to Chavez or Ahmadinejab) causes the supply/demand balance tilt in their way and oil stays up.

  57. 57
    david losh says:

    Good Morning!
    The news of Bank of America buying Country Wide makes sense. Economic sense is what drives global economies today. You guys pull out the charts and graphs like the Kaiser going to war, what do you think they do in board rooms?
    I don’t have to be paranoid to know for a fact that most corporations have a ten year plan. Housing and credit crisis or oportunity is all on which side you’re on. Sure you can make big dollars in the stock market, or Real Estate, no matter what is happening in the world today. I now know three groups who are trading foreclusure properties who are making fifty thousand dollars a month. These are two or three people operations, one has four.
    If you step back for a minute and think about it, money is pretty easy to make. You need a good plan, dedication, and the ability to look foolish.
    I invest in myself. I would never give my money to another company that I didn’t own. Why would I? How can some one other than I work harder or smarter with my money?
    In any discussion of socialism or capatalism you need to look at the words. Making money from other people’s capital is certainly smart, there is no win or lose when you are using other people’s money. If you give me your money what will be my incentive other to have you give me more money. Profit? That there would be me first and you holding the bag in case of trouble.
    If you want financial advice, here you go: quit your job and start a cash business. If you get good enough maybe you can manage other people’s money.

  58. 58
    notabull says:

    “Oil is traded in dollars; as the dollar looses value, the exporting countries loose revenue. A slight cut in production (cleaning, terrorism, strike, a microphone close to Chavez or Ahmadinejab) causes the supply/demand balance tilt in their way and oil stays up.”

    These effects cause the spikes in price that we see, I agree. But the fundamental price is set more in the boring old supply/demand equation.

    I just don’t see how we can at the same time say that they’ll be a huge recession (and a massive drop in demand for products due to that) and also that the oil price won’t be affected. The price is mostly being set by demand, and not by the level of dollar although I’d be the first to say that this is a component of the increase.

    Long-term, I think oil will continue the rise. But it is my belief that the current price is temporary and that we’ll dip down significantly in the next 6 to 12 months. To what level, I have no idea.

  59. 59
    Dave says:

    Oil will continue to rise. If it was only us (NA) driving demand the slower economy would cause prices to drop. The developing world is doing well (well better) – the oil we would have bought will go there.

    Oil at a low price is done. The monster simply hasn’t died yet.

    For the record I think low oil prices was one of the biggest hazards to the planet. I want to see $200 a barrel.

    Dave

  60. 60
    notabull says:

    “The developing world is doing well (well better) – the oil we would have bought will go there.”

    Why are they doing better? Because they’re making all of our crap! China’s internal consumption is rising, but the main factor by far for China’s increase in oil consumption is that they’re making goods for export. So if we buy less of their crap, then they need less oil.

    I agree that cheap oil is gone. And I, too, hope that oil gets more and more expensive. It’s the only way we’ll have a financial incentive to move to greener energy, and a financial incentive is the biggest incentive of all…

  61. 61
    Dave says:

    “So if we buy less of their crap, then they need less oil. ”

    I used to think that way but realized we really need to get by the fact that NA will be less important in the future. It will be a hard mind set shift – I imagine similar to when England stopped being a work power.

    Simply put they to could sell to others and each other. Think the US in the 50’s – you were probably buying something doemestically produced. Combine that with the desire for the consumers dersire overseas ofr the commercial/materialistic crap that we have been collecting all these years means they will find buyers for that stuff elsewhere. The only thing that might slow that particular thing down is the rising costs of the goods due to things like increased oil, not our (NA’s) inability to buy them.

    Dave

  62. 62

    The old anarchist joke went:
    What’s the difference between capitalism and communism?

    Under capitalism, it’s dog eat dog.
    Under communism, it’s just the opposite.

  63. 63
    lil7 says:

    Good luck with timing the market.

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