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The New York Times just did a great piece summarizing the housing woes in Lake Forest Illinois.  It starts with a description of Lake Forest, “the real-life Chicago suburb of Lake Forest is a place where it sometimes seems that all the women drive S.U.V.’s, all the men are C.E.O.’s and all the children have above-average S.A.T.’s.”

So why do Lake Forest residents find themselves at the centerpiece of NY Times article on foreclosure?  It becomes pretty obvious when you connect the dots between two key points:

• The per-capita income for Lake Forest residents is $77,000.
• Available records indicate that the average asking price for foreclosed houses in Lake Forest in the first six months of this year was $860,000. There were more foreclosed properties valued at more than $1 million than there were under $500,000.

It doesn’t take a genius to figure this one out.  Lake Forest houses, nestled in the footsteps of Lake Michigan, have very appealing curb appeal.  The prices went up and up and up, – that is – until they stopped going up.  As long as they went up, the housing ATM of the pseudo-rich continued to work.  The minute they stopped going up, there was no place to go but down.

How much home can you really afford on a $77,000 salary?  If you think $860,000 is a bit much, then you can continue to watch as Lake Forest properties continue their nosedive.  Curb appeal or not, the path of least resistance is down, down, down.

Think the housing correction is over?  Think again.

Andrew Hall is back in the news lately, this time fo his role in contributing to a $104 million pretax loss to Phibro, the commodity gambling trading spinoff from Citibank.   Back in 2008, Andrew Hall made an enormous energy gamble using the capital of Citibank, based on explicit United States government guarantees.  There were essentially two possible outcomes of that gamble.  If it paid off, then Hall would “earn” an enormous bonus.  If the gamble failed, it would have failed on the backs of every American taxpayer, and Hall would have still received his outrageous paycheck.

Way to go, Hall.  You successfully extracted $100 million from the taxpayer via a coin toss lucky gamble, but at least you are now exposed as the fraud you are.

If you want a great reference book for learning stock options and futures, look no further than Michael Mullaney’s book – The Complete Guide to Option Strategies.  It’s a Wiley Press book that came out in 2009 and is surely one of the best out there.

It’s a thick and comprehensive book that covers everything imagineable on the topic of options, starting with the basics, but including advanced topics such as option spread techniques, iron condors, butterfly’s and more.  It even includes several chapters of futures and options on futures trading.

They are isolated stories so far, but a discernible pattern resembling Florida is emerging.  The glut of Seattle area unsold condominium projects continues to rise.  Consider this recent Seattletimes story about Burien’s town square condos, with just 6 out of 124 units sold, built by a now bankrupt developer, funded by now defunct Corus Bank.

Buyers have purchased six of Burien Town Square’s 124 units. No sales have been recorded since October. All ground-floor retail space remains unleased.

Urban Partners, the project’s Los Angeles-based developer, defaulted on its construction loan late last year. Weeks earlier, the federal government had shut down its lender, Corus Bank of Chicago, which made big-time gambles on condo construction in markets across the country during the real-estate boom — and lost…

Related Seattle area condo projects in trouble:

• Bravern luxury downtown Bellevue condo towers revert to rentals
• Zero condos sold at Northgage project after one year on market
• Queen Anne Kerry Park condos face foreclosure
• Mass default of Riverwalk Redmond condo project
• NPR reports on half empty condos in Seattle
• Seattle eastside condos still half empty

Let the hearings begin. Interested viewers of the beginning of today’s testimony are either getting a lesson in the business of Goldman Sachs and market making, or they are terribly confused. Beyond the actual words of testimony from various executives of Goldman Sachs are some subtle undertones of body language.

In the video above, Fabrice Tourre testifies that he “denies categorically the SEC’s allegations”. As those very words come out of his mouth in the first 25 seconds of the clip, his head tilts several times, to the left and to the right.

From the book Body Language for Dummies,

Because the head tilt can be used to indicate that what you’re saying needn’t be taken to seriously, make sure that when you’re making an important point you keep your head upright.

Does Tourre’s head tilt body language have any indication of dishonesty in his testimony?  You decide for yourself.  But for more information on how to better read the body language of our politicians, and financial executives, check out one or both of the books below.

Body Language For Dummies by Elizabeth Kuhnke

The Definitive Book of Body Language by Barbara Pease

Option traders are always looking for ways to reduce risk in their portfolio. One such method is through the use of synthetic positions. A synthetic position is a position that has nearly the same risk/reward and profit/loss curve as another. There is an equivalent synthetic position for all basic positions in a security.

Here is an example of a synthetic option position:

• Long Call Option synthetic is Long Stock + Long Put (married put)

A more complex example is the following synthetic equivalent:

• Option Collar syntehtic is the vertical call spread

When choosing between an option collar or a vertical spread, consider the following:

• Vertical spreads are cheaper on  a per share basis.  However, the question becomes what to do with the left over capital.  If the answer is to load up on many more vertical spreads, then you must understand the significantly increased risk from adding so much leverage.
• Tax considerations – a short term vertical spread will always result in short term tax consequences.  With an out of the money short term collar, the underlying shares can still be held for the long term.
• Adjustments – The adjustment techniques for stock option collars is completely different from that of vertical call spreads.

For more information on the tax considerations of stock options, please refer to the book below:

Capital Gains, Minimal Taxes 2009: The Essential Guide For Investors And Traders by Kaye Thomas

For more information on adjustment techniques of vertical spreads and stock option collars, the absolute best book on the market is shown below:

The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour

We reported on California’s exploding debt problem back in 2008.  Since that time, the problem has gotten magnitudes worse, not only for California, but for numerous states in the nation.

The world can use Iceland and Greece as examples of what happens when government debts get out of hand.  Both countries have introduced painful and widespread austerity measures to bring their books in order, or more accurately, to get them through the next few days or few months.

Back to the states, we witnessed California avoiding the austerity measures in recent years by issuing IOU’s to vendors instead.  California is not alone in their budget woes, as reported by the NY Times recently.

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

Eventually, those derivatives will come back home to roost, and the government outlays and liabilities will only increase.  The fraudulent government accounting schemes will be exposed to the masses, and probably sooner than most people think.  Much of the world was surprised over the last few years with the financial crisis and the partial unraveling of the largest bubble in world history.  Are we really going to act surprised when the rest of the cards come tumbling down?

The Wall Street Journal just had an interesting piece on The Hidden Costs Of Mutual Funds.   For most long term investors that do not dollar cost average, an ETF approach may be a better alternative than the mutual funds, which come with significant management fees.  As an example, consider the Fidelity Select Transportation mutual fund, which according to the Fidelity webpage, carries an expense ratio of 1.03%.  The iShares transportation ETF, on the other hand, carries an expense ratio of less than half that, or .48%.

Back to the hidden costs article.  The WSJ notes that the mutual fund management fees are just part of the espenses:

In selecting mutual funds, most investors know to check the expense ratio, the standard measure of how costly a fund is to own. U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc.

But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.

“These trading and transaction costs are very real,” says Stephen Horan, head of professional education content and private wealth at CFA Institute, a nonprofit association of investment professionals. “While it’s very important to look at that expense ratio, it’s just not going to capture” all of the costs, Mr. Horan says…

A study updated last year of thousands of U.S.-stock funds put the average trading costs at 1.44% of total assets, with an average of 0.14% in the bottom quintile and 2.96% in the top.

Adding a financial advisor into the mix could eat even more into the returns of your funds.  A typical financial advisor would pass along the management and trading fees already associated with the funds.  But they would also add their own management fees to the mix, justified by their “expertise” in picking the funds on your behalf.

If all of those fees are a bit shocking, and you want to learn more about the lower cost ETF approach to investing, you should check out one of these two books:

The ETF Book is a great start for those wanting more in depth information on ETF’s and a more hands off approach to buying into the low cost ETF craze.

The ETF Book: All You Need to Know About Exchange-Traded Funds by Richard A. Ferri

If you are looking to supercharge your ETF investing experience, then consider Trading ETF’s.  It adds more in depth information on ETF trend analysis, entry and exit timing criteria, and even sections on balanced portfolios – mixing a handful of short ETF’s with long ETF’s.

Trading ETFs: Gaining an Edge with Technical Analysis by Deron Wagner

Also check out:

• Most Active Optionable ETF’s – Lower BID ASK Spreads
• Correlation Error With Leveraged ETF’s
• Portfolio Hedging With Index Puts
• Married Puts, Collars, And Hybrid Hedging
• Portfolio protection – hedging todays roller coaster market ride

If you have an Optionsxpress brokerage account, and you use Gainskeeper software you are in for a nice surprise just in time for tax season.  There are reports of many customers data feeds completely broken at Optionsxpress.  Some Gainskeeper reports are coming up completely empty, some of them have completely irrelevant data.  One Optionsxpress customer reported to Geldpress that his case with Optionsxpress has been opened for over a week with no update and no resolution.  Optionsxpress is reportedly passing the buck – telling customers that the problem is with the Gainskeeper platform.  They do admit that it is affecting “many” accounts, but give no estimate for the time to resolve, stating only that it is a high priority.  On the Optionsxpress Gainskeeper page, there is a general message that states “Please Note – Gainskeeper has identified a problem with their tax software for portfolios with options expiring in 2010. This issue will be resolved shortly.“   There is however, no mention, of the general problems with the Gainskeeper feed – irrelevant and mysterious data showing up in individual Gainskeeper tax reports.

Optionsxpress charges a $24.95 fee for use of the third party software.  At last check Scottrade and some other brokerages provide free use of Gainskeeper to its customers.   The Geldpress research team has not heard of any broken or incorrect data feed problems with the use of Gainskeeper on other platforms such as Scottrade.

Optionsxpress customers who have paid the $24.95 fee for the use of Gainskeeper may want to double check the tax report generated with the tool for accuracy.

Have you found an issue with Gainskeeper? Tell us about it here

For more general information on trader related tax rules, check out the following book:

Capital Gains, Minimal Taxes 2009: The Essential Guide For Investors And Traders by Kaye Thomas

Few people really understand the breadth of the financial sector bailout beyond the $700 billion TARP program, some of which has already been paid back.  Virtually everyone in government, the main stream news, and of course the financial sector is doing their best to sweep the entire bailout under the rug.

Dylan Ratigan is one of the few, if not only, main stream news reporters that attempts to tell the whole story – in all their the ugly and painful details.  Here is an MSNBC clip of Ratigan going off on what he calls the $23.7 trillion bailout.  Dylan is absolutely right that the TARP program is a mere drop in the bucket compared to the overall bailout.  But unfortunately, he does not go into enough details or even provide sources for the $23.7 trillion figure.

So where does the $23.7 trillion figure come from? SIGTARP, an oversight commission created at the same time as TARP, produced quarterly reports that present a much more detailed view of the financial sector handouts bailout program.  The July 2009 Sigtarp report contains the $23.7 trillion figure, as shown in the graphic below.

It’s called “Total potential support” because not all of the money has actually been spent.  Much of the potential costs are associated to government guarantees for financial system transactions, which according to the financial institutions, are backed by a pile of worthless paper “assets”.

Two additional SIGTARP quarterly reports have been released since the July report with the $23.7 trillion reference.  True to government form, there is not much consistency in the look and feel of these average 250 page reports.  The section which contained the $23.7 trillion figure – “TARP in context with other programs”- has been removed from subsequent reports.  It’s likely still possible to extract the new figure with a painstaking comb through of the report.  My hunch is that this was intentional.  SIGTARP and the government agencies that created it do not want the true cost of the financial bailout known, or at least not easily known.

Have you found the updated “Total Potential Support” numbers in either the October 2009 or January 2010 SIGTARP reports?  Add the page and section numbers in the comments below.

Also See:

• Total Bailout Cost Now $12.8 Trillion
• Is the FDIC Insurance Program Insolvent?
• Yearly Budget Deficit Tops $2 Trillion