Geldpress

The recent profile of “Mr. Microsoft” and his decision to walk away from his mortgage generated quite a stir.  Some were supportive, while others were vehement and angry.  The Mr. Microsoft story was a story profiling one individual, but perhaps there is a Mr. Microsoft in a neighborhood or city near you.  Perhaps there are hundreds and thousands of Mr. Microsoft’s all over this country, working hard, and eager to buy a slice of the American dream.

The average employee at Microsoft has a 4 year degree in engineering, computer science or other highly employable field.  Many have masters or doctorate degrees.  Most of them worked very hard to obtain their degrees and they feel a sense of entitlement from their hard work.  It’s not a sense of entitlement in the ordinary sense, but one of expecting a comfortable lfestyle and the ability to buy a modest place to live and call home.  Outside of Microsoft, other engineers, scientists and doctors from companies everywhere feel the same way.   The median household income in the United States is only $46,326, accorindg to the Census Bureau.    In many cases, the educated “Mr Microsoft’s” that hold degrees and work in corporate America earn twice that amount or more.  The homes they want are not the McMansions that the media mistakingly cites as the cause of the foreclosure flood.  They just want a modest home, similar to what they may have grown up in, or in many cases even smaller:

• 1000 – 1500 square feet
• 2 bedroom and 2 baths
• Built within the last 15 years to reduce maintenance costs

The list above are not the requirements for a McMansion!.  The list of requirements above is very modest, but the prices in major metropolitan areas and up and down both costs for homes meeting that list are simply not affordable, to anyone with an average Mr Microsoft salary (excluding Bill Gates of course).  Rather than using the intelligence they are  so fond of, the Mr Microsoft’s of the world ignored reason and reality (the reality that RENTING IS CHEAPER THAN OWNING), and enabled the con artists of the world (bankers, mortgage brokers, real estate agents, appraisers) to sucker them into one of the worst financial decisions they have ever made.  And that horrible decision has only two possible outcomes:

1. Write it off, and walk away and leave the mess to the con artist bankers (and unfortunately the taxpayers)
2. Continue to throw good money after bad on a depreciating asset

The Mr Microsoft in Redmond chose to recognize his mistake and walk away.   What will the thousands of other Mr Microsfts in the country do?  It’s a difficult decision to make, but it may be even more important than the initial purchase decision.  Read this story for another view on somebody else struggling with this very decision.

Home prices continue to plummet across the nation.  Lending standards are finally APPROACHING (not there yet!) reasonable levels.  Prices will not stop declining until the monthly cost of ownership equals the monthly cost of renting.  We have a long way to go. Now is not the time to buy.

From the department of treasury website, here are the top 15 foreign holders of United States debt.

George Bush managed to nearly double the national debt of the United States from just 8 years in office, from $5.7 trillion when he took office to $10.6 trillion when he left.  Obama may have inherited this nightmare of debt implosion, but he has no intention of steering the ship back on course.  Obama’s mission is to socialize the losses of every failing industry in the United States, and he could easily double the national debt again in half the time it took George Bush to do so.   With so many new debt sales on the line, its important to keep track of who currently owns our debt, and who has the continued capacity to do so in the future…

China - From the list above, they are the number one holder of United States debt.  For years, their economy was unstoppable.  Yet from this recent Wall Street Journal article,

China recorded a fiscal deficit of 111.01 billion yuan ($16.23 billion) for 2008, as government spending surged in the final month of last year when Beijing ramped up its stimulus measures to boost the flagging economy.

And for Kiplinger’s view of China…

China is staggering under the near simultaneous collapse of overseas demand for its exports and of its domestic property market. Large numbers of factories are shutting their doors, and those that remain are scaling back orders…As China’s exports decline, it will have fewer dollars to recycle. Inevitably, that will push U.S. interest rates up.

Japan – Their economy continues to weaken, and from this Bloomberg article, investors are not eager to dump money on U.S. treasuries.

Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed. Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a “significant” or “slight” risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds.

United Kingdom -The U.K. financial Services Authority attempts to sugar coat it by saying “weighted to the downside and, while the effects of fiscal stimulus and monetary easing remain unclear, the recession may be deeper and more prolonged than expected.”  (From International Herald Tribune) But it sounds like their capacity to buy U.S. debt has diminished!

Carribean Banking Centers – Give me a break!    They stopped buying in November, and now they are just rolling it over to buy time!

Oil Exporters – $40 oil is not good for short term thinking economies who to quickly came to DEPEND on $150 oil.  Read this Herald Tribune article, and ask yourself if they have the capacity to buy more U.S. debt.

The combined economic growth of the six Gulf Arab oil-exporting countries is expected to fall to 3.5 percent this year from 6.8 percent in 2008, according to the International Monetary Fund.

Masood Ahmed, director of the IMF’s Middle East and Central Asia department, said Sunday in Dubai that the countries – Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain – were expected as a whole to post a fiscal deficit representing 3.1 percent of gross domestic product, compared with a surplus of 22.8 percent of GDP in 2008.

Shall I go on…?

It’s becoming very clear that the department of the treasury will have an insanely difficult time selling as much new debt that’s being offered, especially at record low interest rates…  Let’s not even talk about what kind of impact this will have on mortgage rates and housing prices!

Also check out:

• The United States Has Not Had A Balanced Budget Since 1957!
• California’s Exploding Debt Problem
• Washington state debt history – does Dino Rossi understand it?
• The United States National Debt Limit Has Become A Joke
• California’s Exploding Debt Problem

Bloomberg Press just released a new book on credit default swaps, entitled CDS Delivery Options.  Here are a few chapter titles that sparked my interest and may warrant a purchase of what could be an informative and entertaining book:

• The Music Stops in Home Prices, Lending, Wall Street
• Fed in a Box
• The End Game for the Government Sponsored Enterprises
• A Review of Treasury Futures Mechanics
• Distorted Economics

There are two chapters devoted to moving the economy forward – “Designing an Angency Credit Derivatives Futures Contract” and “Bringing the Index to an Exchange”.  These chapters lead me to believe the book’s main audience is the crooks on Wall Street who created this mess.  It also leads me to believe that the crooks would have EVENTUALLY stepped in to clean up their own mess, had the government not handed them blank taxpayer funded rescue checks.

The last chapter is a bear market case study on “The ABX Meltdown”.   It’s possible that this chapter could discuss Barrick Gold’s 2006 buyout offer for Nova Gold…  Additional update after the book arrives…

CDS Delivery Option: Better Pricing of Credit Default Swaps by David Boberski

Check out the volume of Calls vs Puts on the GE February or March options.  Call volume outnumbers put volume by 2:1 in the March “at the money” 12.50′s.  I’m bearish on the economy in 2009, but I’m going long GE for a trade this week to balance out more of my downside plays, and to play the potential short term Geithner rally.

Disclosure: Long March 12.50 Calls on GE – FOR A SHORT TERM TRADE.

Disclaimer: Stop buying and selling based on Internet blogs, UNLESS you TAKE RESPONSIBILITY FOR YOUR OWN TRADES!!!

Printed books may not go the way of the typewriter very soon, but electronic book readers are definitely the hot trend of the day.  Here is a forecast of three technologies for electronic book reading.

Amazon Kindle – The first version sold out immediately last year, and subsequent consumer orders were backfilled months later.  The Kindle 2 is available for pre-order now for $359, and will be shipped out on February 29th.  Amazon reports there are 230,000 electronic books available in Kindle format, all of which can be wirelessly downloaded to the device in under 60 seconds.  As a bonus, most Kindle electronic books, including New York Times best sellers, are available for just $9.99, a fraction of the hard bound or paperback versions.  Amazon’s vision is to “have every book ever printed, in any language, all available in under 60 seconds on Kindle”.  Newspapers, magazines and blogs are also available for download from Amazon’s Kindle store.  To pre-order your Kindle 2 now, just click the image below:

Sony Reader – Not afraid of competition, Amazon also sells the Sony Reader on its site.  The PRS-700BC sells for $399.99, slightly more than the new Kindle 2.  According to most other review sites, the Sony Reader does not have nearly the availability of titles as the Kindle.  The Sony Reader also has no wireless connection, and getting books to the device requires connecting it to a computer for the transfer.  But the Sony Reader can view more file formats than the Amazon Kindle.  The availability of titles (or lack thereof) may be akin to the old VHS and Beta wars or the 80′s.  My vote and my money goes to the Kindle, but if you want the Sony Reader, you can order it from the link below.

Google Mobile Reader – For those with an iPhone or the new Google G1 phone, you can read more than 1.5 million public domain titles for free with the Google Mobile Reader.  There is no application to buy or download.  Just point your mobile browser to http://books.google.com/m to get started.  If you don’t have an iPhone or G1, just use the http://books.google.com link to read the books on your PC or Mac.

Happy Reading…

A hybrid collar option play on Bucyrus was mentioned on Geldpress at this link last week.  The idea was to put a collar around Bucyrus and protect against a potential decline in February earnings.  The Bucyrus collar mentioned was the following:

• Purchase shares in Bucyrus
• Sell March covered CALLS
• Buy February PUTS, for much cheaper than the March covered call premiums.

And the idea was to WAIT on buying the February Puts because of a perceived and imminent decrease in implied volatility.  That’s the “hybrid” portion of the collar – timing the individual components of the option play.

Well, as of today, the protective PUTS on Bucyrus are significantly cheaper than they were after the play was first mentioned.   Take a look at the February 15 PUTS on Bucyrus, which can be had for just $50-$55 (previously $80-$120) per contract as of today.

Disclaimer: Trade at your own risk!

This house likely went on the market in Redmond even before the announced Microsoft layoffs.

It’s listed on Zillow for $584,900, but was last sold in January of 2008 for $717,192.  That’s an 18.5% price decline in just a little over 1 year.  Just stop and wonder what kind of price declines there will be 1 year from now, with thousands of additional layoffs, more salary cuts, missing speculators, tighter lending standards, and (hopefully) smarter consumers…

Now is NOT the time to buy…

If you have a heartbeat, or a dog or cat with one, chances are you have seen dozens (or thousands) of pre-approved credit card offers in the mail.  What criteria do they use to pre-approve you?  Where do they get the information?  And is this really legal?  Can I opt out?  Can I complain?  Can I file a lawsuit?  Read below to find out.

I’m not a lawyer, but I do read, comprehend and speak the english language.  And based on the Fedeal Trade Commission’s Fair Credit Reporting Act, it is readily apparent that pre-screened credit cards are illegal.  There are 11 consumer rights specifically listed in the Fair Credit Reporting Act, including:

• Access to your file is limited. A consumer reporting agency may provide information about
  you only to people with a valid need — usually to consider an application with a creditor,
  insurer, employer, landlord, or other business. The FCRA specifies those with a valid need for
  access.
• You may limit “prescreened” offers of credit and insurance you get based on information
  in your credit report. Unsolicited “prescreened” offers for credit and insurance must include
  a toll-free phone number you can call if you choose to remove your name and address from the
  lists these offers are based on. You may opt-out with the nationwide credit bureaus at
  1-888-5-OPTOUT (1-888-567-8688).
• You may seek damages from violators. If a consumer reporting agency, or, in some cases, a
  user of consumer reports or a furnisher of information to a consumer reporting agency violates
  the FCRA, you may be able to sue in state or federal court.

According to the FTC fact page on “Prescreened Offers“,

Many companies that solicit new credit card accounts and insurance policies use prescreening to identify potential customers for the products they offer. Prescreened offers — sometimes called “preapproved” offers — are based on information in your credit report that indicates you meet criteria set by the offeror. Usually, prescreened solicitations come via mail, but you also may get them in a phone call or in an email.

Prescreening works in one of two ways:

• a creditor or insurer establishes criteria, like a minimum credit score, and asks a consumer reporting company for a list of people in the company’s database who meet the criteria; or
• a creditor or insurer provides a list of potential customers to a consumer reporting company and asks the company to identify people on the list who meet certain criteria.

Is this Legal? – NOT A CHANCE!  The federal credit reporting act specifically mentions in your list of rights that ACCESS TO YOUR FILE IS LIMITED. Access should be granted ONLY for a VALID NEED – To consider  an APPLICATION for credit. By definition, an UNSOLICITED pre-approved credit card offer is NOT a response to an APPLICATION. Therefore, by the consumer rights listed in the fair credit reporting act, unsolicited credit card offers are illegal.  Credit reporting agencies that supply banks and other creditors with consumer lists meeting a threshold criteria are violating the fair credit reporting act.

What can I do about this? -  You essentially have 2 choices:

1. Follow the recommendations of the FTC and request to OPT OUT of receiving such offers.  Dial 1-888-5-OPTOUT (1-888-567-8688) and tell them sto stop.  This does work, and the pre-approved offers will stop.
2. File a complaint with the FTC against the 3 major credit bureaus for violating the fair credit reporting act.  In all likelihood, they will not respond.  Like most enforcement agencies in the government (Bernie Madoff and the SEC), they are asleep at the wheel and have no intention of enforcing the very laws that they wrote.  But if enough consumers complain, it will get their attention.  And if you have the gumption and the financial backing to pursue it, then kick off a class action lawsuit against the 3 credit bureaus for releasing your information (ala pre-approved threshold level) to creditors without your explicit written permission.

The Geldpress team attended the first Seattle Condo Tour last year, where desperate high rise condo developers showcase their unsold properties for lavish prices.  From my perspective, it was just a futile attempt to lure in the last batch of rich Seattle morons.  And for the morons that didn’t have the $800,000+ for those tiny studio and 1 bedroom condos (still under construction), there was no problem.  The developers would happily etch another notch in the “Sold” list for just a tiny deposit or even a signature.  But those “Sold” condominiums often come right back on the market as cancelled sales when the “buyers” don’t get approved financing, or back out due to massive price declines ahead of completion.

If you don’t believe that developers would list properties as “Sold” without a down payment, take a look at MGM’s project – Las Vegas City Center.

According to this Forbes article:

In a note to clients, Daswani said MGM has sold 55 percent of the condo units to date, but has received only 20 percent of the deposits. The analyst cautioned that if the units’ prices fall about 15 percent to 20 percent from current levels that the project will turn out to be a loss for MGM.

Geldpress comment: Consider it done!  15-20% price declines are absolutely going to happen at a MINIMUM.  For a gambling metropolis that thrives on minimum wage incomes, it’s impossible to justify the insane pricing at City Center.  Also note that they reported selling 55 percent of the condos, and 80% of those reported “sales” were based on nothing more than a signature and a handshake!

The article also notes:

MGM Mirage may see a default rate of 20 percent to 30 percent on its CityCenter condominium units and faces the possibility of some asset sales, an analyst said Tuesday as he started the casino operator with a “Sell” rating.

Geldpress comment: MGM is toast in the likes of “Countrywide toast”, “Bear Sterns Toast”, “Lehman Brothers Toast”, and “Rye Toast”.  And despite future desperate pleas from the mayor of Las Vegas and governor of Nevada, MGM will NOT be declared “To big to fail”.  As for trading MGM, it’s to late.  The easy money was shorting MGM when it dipped below $40 last summer, and then dipped below $30 last Fall.  At these levels ($6.12 at last glance), there are no shares to borrow for shorting, and the options premium on the PUT side is to exorbitant to even bother.  Good Bye MGM.  Thanks for the memories!

Disclosure: No current position on MGM.

Trading stock options can be fun, addictive, and potentially profitable. People are drawn to stock options because of the potential for out-sized and highly leveraged returns. But leverage works in both directions, and trading stock options can also be fatal to account values when trading without the proper knowledge and experience.

On the surface, stock options are a simple tool to both manage risk and enhance returns.  But to avoid costly mistakes, it is necessary to have a more intimate view of stock options.  That view should include a thorough understanding of the option greeks (delta, gamma, theta, vega, rho), pricing models, trading strategies and adjustments, and portfolio management.  All option books provide a snapshot of the option greeks, but for that intimate view of the option greeks, you will need this new book by Dan Passarelli, Trading Option Greeks.

Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit by Dan Passarelli

Like all option books, this book starts with a high level overview of stock options – opening and closing positions, expiration cycles, standardized contracts, and expiration day price modelling.   But the book accelerates from there to provide a deep understanding of all of the option greeks.   And there is an entire chapter devoted to the subject of volatility, something close to the hearts of options traders experienced in the financial turmoil that started in 2007.  Rounding out part one of the book are discussions on put-call parity and synthetic positions, volatility-selling strategies, and the effect of dividends on option pricing.

Part 2 of the book digs right into some complex trading strategies such as vertical spreads, iron condors, butterflies, calendar spreads and diagonals.  But every strategy discussed is done so with a keen view on the affected option greeks.    The example on the bear spread explicitly shows the assumed values of all option greeks at the beginning of the trade.  As the assumed time and stock price changes, all of the option greeks change as well.   The dynamic relationship between option greeks and time and stock price is the key to really understanding and trading options profitably.  Dan’s book is the best one out there that delivers on this premise, while at the same time providing details on complex option trading strategies.

Part 3 of the book provides 3 additional chapters on the subject of volatility.  And it ties in the volatility discussion with advanced trading styles that few people understand and implement well.  Delta neutral and gamma neutral trading are methodologies to reduce volatility in account values.  It involves taking multi-sided positions and spreads that balance out the greeks.  It’s easy to start a new delta neutral and gamme neutral portfolio, but managing it and keeping it neutral is a little more work.  Passarelli’s book covers both sides of that difficult equation in great and easy to understand detail.

Part 4 of the book adds additional insight into more trading strategies – straddles and strangles, and other complex spreads.  And it also gives general guidance on the psycological aspect of trading, and the trader’s thought process.   If I had to conceive the idea for my own options trading book, this book would come very close the vision.  It’s another one of those must and must own options books that belongs on every traders bookshelf.

Trading Option Greeks: How Time, Volatility, and Other Pricing Factors Drive Profit by Dan Passarelli