The April Case Shiller index values have been released and the results show continued price drops in most cities forecasted. In a strange twist, however, prices appear to be levelling off in several of the forecasted cities. Potential buyers should beware of false hopes for a bottom as this may just be a mirage before the continued storm of relentless price drops. Don’t forget that interest rates were artificially deflated for a few months due to the Fed’s intervention in the markets. The artifically low 4.5% 30 year mortgage rates were short lived, and jumped almost 30 percent in a single day at the end of May.
If you are watching the Case Shiller index values to find a housing bottom and time a buying opportunity, here are a few guidelines you may with to consider:
- Look for a trend based on at least 3-4 months of Case Shiller values. False bottom signals can appear frequently and give the potential buyer false hope.
- Don’t get fooled into rushing your purchase based on the $8,000 tax credit. The $8,000 is not going to help the buyer who loses $20,000 to $50,000 or even more from a 10% annual depreciation.
- Don’t get fooled into buying because of low interest rates. Real estate agents love to push this bad advice on perspective buyers – “Buy now before rates go up”. The best time to buy is when interest rates are high and demand and prices are low!
And now, here are the latest Case Shiller values. The chart below has the last 4 months of data transposed, but you can get the raw data here if you like.
The boys from Dilbert have it right. Home “owners” lose, and the smart money is still renting. It is NOT time to buy a home yet.
Michael Jackson earned enormous sums of money in his live and lived the life of a King. But his balance sheet showed otherwise. Despite selling over 61 million records throughout his career, he died yesterday swimming in debt. From the Associated Press:
Yet after selling more than 61 million albums in the U.S. and having a decade-long attraction open at Disney theme parks, the “King of Pop” died Thursday at age 50 reportedly awash in about $400 million in debt, on the cusp of a final comeback after well over a decade of scandal.
Back in 2005, Bank of America must have realized early that Jackson’s financial mess would be hard to overcome, and sold off his debt to Fortress Investments, a private hedge fund.
Jackson was not the only high income celebrity who struggled financially. Money Magazine published an article about the Debt disasters of the rich and famous. Here are a few points from that article below.
- Donald Trump struggled a decade ago with $900 million in personal liabilities.
- The Jackson parents went bankrupt with $45 million in debt.
- Wolfgang Amadeus Mozart fell heavily into debt and was buried in an unmarked pauper’s grave.
- Burt Reynolds declared bankruptcy in 1996, citing more than $8 million in debts. He did however get to keep his $2.5 million estate Florida.
- Corey Haim, the star of 1987 film “The Lost Boys,” filed for bankruptcy in 1997.
- In 1999, the BBC reported that Elton John asked a merchant bank to help him borrow $40 million to pay off his debts. A year later he admitted running up debts more than $2 million a month.
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Remember when Bear Stearns went belly up in March 2008, plummeting to a near zero stock price? (incidentally,this was just days after Chief CNBC Clown Cramer recommended it for the last time)
Option volume on the PUT side of Bear Stearns was at record levels just days and weeks before the implosion, implying that somebody knew the disaster was coming. And those somebodies captured serious profit from their ill gotten bets.
For those that believe in the power of big money and their big bets in the option markets, there are at least a few FREE services out there that report on unusually high option activity volume. Here is a roundup of three of them. Please add any other free high volume option alert services you find in the comments section.
- Schaeffer’s Research posts 2 tables of Unusually High option volume – calls and puts. The tables are at this link.
- Andrew Wilkinson takes it a step further. He publishes a daily option update that provides info on high option volume trades. But he also provides a description of what the possibility of those high volume trades are. Andrew’s daily articles are at this link.
- The Optionmonster website offers detailed option activity as part of its fee based Heat Seeker functionality. But a basic membership to the site is free with registration, and a snapshot of some of the Heatseeker activity is available for free on the registered users home page.
The newest Apple 3Gs version of its popular iphone was released on Friday, and has reportedly sold over a million units in its first weekend. The “iphone dev team” (not affiliated with Apple) also released a free iphone unlocking utility called Ultrasnow. This is a full software unlock method for the iphone 3G, but does not work on the newer 3Gs version.
Iphone users are now finally free to port their iphones to the carrier of their choice, but may unfortunately have to pay a stiff penalty to the non carrier of choice for the termination fee.
In other news:
One of the biggest advantages of trading in the commodities, futures and forex market is the tax simplification. Active traders – especially day traders – know that tax time can be painful with the requirement to log every trade with the IRS. For those that practice channel trading and dollar cost averaging, it becomes even more complicated with the IRS wash sale rules. Taxes on futures – which can include commodities, futures and the forex market – are much simpler. From the book Getting Started in Commodities, by George Fontanills:
Futures on both individual commodity futures and index futures are subject to Section 1256 of the Internal Revenue Code. Gains on Section 1256 contracts are taxed as if 60 percent of the profits are long-term gains and the other 40 percent of the gains are short-term. This scheme creates a blended tax rate of 23 percent, regardless of holding period…
The downside to Section 1256 treatment is that all contracts are marked to market at the end of each year. Taxes are due as if each contract was liquidated on December 31, so profits cannot be deferred.
Of course taking advantage of the special tax treatment first requires one to learn about how to trade commodities. The best book to get started with this quest is Fontanill’s book below. Just click on the book to buy it.
Getting Started in Commodities (Getting Started In…..) by George A. Fontanills
Calendar spreads are a type of option spread system that involves buying and selling two different options across two different expiration months. Traders love to use calendar spread in range bound markets. A true calendar spread would involve the same strike price for both options. Some traders prefer to utilize what is called the delta advantage with calendar spreads. For a call options, recall that the delta of an at the money call is about .50, and the delta increases as the options increase their distance into the money. So a deep in the money call option would have a delta that approaches 1.0.
There is a substantial difference in the outcome of calendar spreads that are at the same strike vs those that have a delta advantage. The following examples will better explain the difference. Consider the following calendar spread examples, using WalMart (arbitrary, not a recommendation!), and today’s closing market prices for the options. The Optionsxpress Trade Calculator tool is utilized to generate the graphs for these examples.
Example 1 – Purchase (10) Jan 2010 LEAP option on WMT at the 45 strike for $5.65, and SELL (10) July 2009 50 strike options on WM for .47. This is the delta advantage example. The profit/loss graph is shown below, as of the July expiration date.
Example 2 – Purchase (10) Jan 2010 LEAP option on WMT at the 50 strike for $3.00, and SELL (10) July 2009 50 strike options on WM for .47. This is the true calendar spread, with no delta advantage. The profit/loss graph is shown below, as of the July expiration date.
Analyzing the Differences – Consider three extreme examples of price movement near the front month expiration of July 17th.
- Price settles at or near 50 – Both calendar spreads – with and without the delta advantage – do well, and are profitable. But the delta advantage spread does exhibit a higher profit, as shown above ($1257 vs $854).
- Price spikes well above 50 – The delta advantage spread remains profitable. There is still a $321 profit near a price spike to 56.69. However, with a true calendar spread and no delta advantage, a large upward price movement could be disastrous. A $1283 loss is realized at a price movement to $57.17.
- Price drops well below 50 - The delta advantage loses money. Notice that a price drop to $45 on July expiration results in a loss of about $2135. The standard calendar spread – no delta advantage – also loses money on a big price drop but not nearly as much. Notice that even a price drop to $46.52 only results in a position loss of $738.
The bottom line is that when utilizing calendar spreads, you should analyze the possible outcomes ahead of placing the trade.
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Disclosure: Currently Long and Short WMT via delta advantage calendar spreads, and covered calls.
Disclaimer: No accuracy guarantees for anything on this site. Trade at your own risk!
Struggling airline British Airways is taking an unusual step in these tough economic times, asking its 40,000 employees to keep working, but without paychecks.
From Marketwatch:
British Airways has asked its 40,000 staff to work without pay for up to a month as the ailing airline seeks to cut costs.
The group, which made a record £401 million loss in 2008 amid surging fuel prices and a collapse in premium-fare passengers, is seeking to reduce costs dramatically and has already offered staff unpaid leave or a reduction in hours.
Willie Walsh, BA’s chief executive, has now gone a step further by asking staff to volunteer for between one and four weeks of unpaid work in what he says is a “fight for survival.”
Mr Walsh, who said last week that he would work for free in July, has set a deadline of June 24 for employees to volunteer for unpaid work. He said that the salary deductions would be spread over three to six months wherever possible..
British Airways is not the only company pushing salaries down. Here is a sampling of other salary reductions hitting the news.
It’s hard to keep track of all the nonsense on foreclosure moratorium’s these days. What is clear is that all layers of government are insistant on rewarding incompetence, and irresponsiblity, and punishing responsible taxpayers. The nationwide foreclosure moratorium may have ended, but don’t think for a minute we have moved any closer to a market based economy. Here is just a sample of the new ridiculous anti-market, anti affordable housing, anti taxpayer initiatives hitting the news lately.
Smart Money Magazine recently ran a story in their July issue titled When To Get Back In the Market. For the article they interviewed economists, managers and strategists to find out the signs of detecting a true long term rally. Here are some of the signs:
- Stock Market Moves – A potential long term rally will have good performance across all sectors, not just a handful. To view a snapshot of all sectors, check out this Morningstar sector link.
- Borrowing and Lending – When corporations can get the money they need to expand their businesses and hire new employees, it could mean a healthy environment for a recovery. The TED Spread is a commonly used metric, which compares the difference between the interest rates on treasury bills vs other kinds of loans. When that difference is low, it suggests that companies can borrow at attractive rates, which is a sign of a potential recovery. Check out the TED spread rates here.
- Business Hiring and Spending – Check the unemployment claims at the department of labor website for signs of a longer term recovery.
- Consumer Behavior – Check the consumer confidence numbers at the Conference Board business trade group, and look for consecutive months with scores about 50.
- Housing – Look for new housing starts numbers at the Census Bureau’s New Residential Construction index.
Or, if you have no time to look at all of these indexes, you can use a simple technical analysis approach to investing, you can use one of the options from the post below: