Housing market in free fall!

Look at this forward guidance from Hovnanian! From Bloomberg:

Hovnanian Enterprises Inc., New Jersey's largest homebuilder, said it sees third-quarter earnings per share of $1.10 to $1.20 per share, less than the $1.41 expected by analysts in a Thomson Financial survey.

Hovnanian, Goodyear

"Hovnanian cut its full-year profit forecast to $5.00 to $5.75 per share from a forecast of $7.20 to $7.40 earlier. Hovnanian said it's renegotiating a ``significant number of land option pacts'' and cited a slower pace of sales and high cancellation rates for the reduced earnings."

And oh, in my industry "renegotiating a significant number of land option pacts" means either the Seller gives you a better price and terms or you walk from your option money (forfeit).

MarkM

Rydex leveraged shorts have been rising with market. That is bullish given the rally, provides buying power to break through resstance?

Of the 21 sector funds at Rydex 28% of total assets are in energy (2 funds). 15% Pr metals. This sentiment is confirmed by media ads- most invetsment ads I am hearing are for 1) energy/drilling 2) gold/coins 3) real estate (!)

Running with the crowd can be hazardous to your wealth. If one is long these sectors an adequate hedge, cash, bonds desirable IMHO.

The tone of the market has improved (for the moment) including my tech, internet and chemicals. Another area traders are pessimist about is retail based on sector funds (and sell off)... paving the way for me to add exposure to the victims yesterday.

Bill , If silver can break above 12.32 the first target is 13$. support at 11.95$ and 11.63$ .

http://photos1.blogger.com/blogger/7214/1988/1600/xag803.jpg

Piggybacking on Mark M's post Re Housing....Stated with the understanding that casual observation is not solid evidentiary matter: Trustee Sales for properties with note defaults $90K are up (Richmond, VA). Until the last month or so, most defaults were $80K and under--some apparently for low enough amounts that they appeared to be equity loans. Today, there were 27 listings with 11 (41%) of those $90K or greater. I know that this is only the start. I feel like I'm watching a train wreck.

stockman-

I went long NatGas recently and hedged it with BEARX along the lines of your thinking re energy bullishness. The NatGas space was SO beaten down. So far, so good.

Everyone is looking at October/November for the lows. If Mr. Market chooses to inflict maximum pain, does the bottom come in January instead? I don't care one way or another as my portfolio is working for now (crosses fingers).

Leisa, DataQuick also reported that default notices have reached a 3-year high in California, too.

MarkM, Hovnanian's stock price rose 8% yesterday. A bad employment report may blunt the sell off that is already underway in pre-market as the market seems to believe an interest rate pause engendered by a weakening economy will somehow make everything right again.

Stockman, you write that leveraged shorts have been rising with the market. It seems to me that this is exactly what happened in the HB sector over the past few days.

Commodities not joining the rally so far-
is this the new "tell"?

DIA and IWM with hourly rsi' in the 80's.

I was just wondering if the pros could kindly answer a strategic operational question (re. options).

For somebody who a while ago bought Dec/Jan index puts that were originally 'in the money', but now are 'out of the money' (example: DIA Jan 108), and still expects the market to go down, is he/she better off selling them and swapping them for in-the-money puts (say DIA Jan 120)?

There would be double comissions plus the difference in bid-ask price, but is the swap still better off? Any comments?

Thank you so much for sharing your knowledge.

Yipeee! the economy's slowing down with inflation! earnings estimates will have to come down! YaaaaY!

ok. i got my humour out of the way. i have to laugh when i handicap a move this poorly. i'm going to cover where i need to but overall i think the tennis ball that's been tossed to the ceiling is going to reach the point where gravity takes over somewhere in the next few trading hours.

either that or it's different this time.

tradesman, i'm watching the OIH/oils and wondering what's behind their lack of participation in today's festivities. also, check out NUE, another strong economy type of stock. interesting.

mtzion

... ya, maybe it is these strong economy stocks, metal stocks and energy stocks - that are the ones that are going to be taken out back and "shot"

mtzion, you're absolutely correct in your analysis. At this point, we can only watch the tape to see if there is any follow thru with the dollar. A huge struggle here, with very powerful "global" forces attempting to create a "new paradigm" where less is more and more is less.

Alan, you guys keep reminding me of the tech bubble, a "new way" of doing things that would change everything.

mtzion: good one, you made me laugh.

But, oh no, what is this, reality settling in now!!!

mtzion, I feel the same way. I'm watching the HBs and they went up sharply on this "great" news for the housing market, but they've lost steam since then.

I shorted HOV when, as I expected, it tagged along with the rest of the HBs despite its woeful pre-announcement.

This has been my worst week in the market this year. I need to learn to hedge better -- which is why I read this blog, of course. But more studiously, it seems.

BTW, speaking of hedges, who's keeping the lid on the metals?

Stagflation at the door?

Peter Morici, professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission, thinks so:

"Economy Added 113, 000 Jobs in July
Unemployment Jumps, Stagflation Has Arrived

Today, the Labor Department reported the economy added 113,000 payroll jobs in June, and the unemployment rate rose to 4.8 percent from 46 percent in June. The consensus forecasts were 150,000 new jobs and unemployment at 4.6 percent.

The revised figure for June jobs growth was 124,000. June and July jobs numbers indicate the economy is adding too few jobs, and unemployment is likely to continue rising.

Sub par jobs growth indicates the economy is slowing, more than Wall Street analysts and Federal Reserve policymakers anticipated. A weaker housing market and higher gas prices have slowed consumer spending, and this is slowing business investment, construction and jobs creation significantly."

Wages were up 0.4 percent in July, after rising 0.4 percent. Rising wages provide a clear sign that oil inflation is spreading into the labor market, even as unemployment rises.

Stagflation has arrived. The misery index—unemployment plus the interest rate—is above 10 percent.

Yet, weak jobs growth indicates higher interest rates are slowing the economic expansion and that inflation will cool in the months ahead. The Federal Reserve should not raise interest rates when it meets August 8.

Unfortunately, the recent surge in consumer prices is pushing the Federal Reserve toward additional interest rate increases, but these risk killing the economic expansion altogether and a long bout with stagflation or a even a recession.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

transports looking like they're gonna give it up here......but that's o.k. we don't need a strong economy to support earnings for companies that move coal, haul produce, ship boxes and fly around the world.

and ryland went red.

ALOHA !!

number2son posted:
"Who's keeping the lid on metals?"

The only ones that have a vested interest in keeping paper IOUs in power ... Central banks! I must say they are losing the fight though since all you have to do is compare a five year chart of gold and the USD Index or any currency index ... Gold up 25% per year increase. Silver is averaging more than 30% over five years. All the central banks sold their silver a long time ago ... playing paper now! COMEX silver inventory is dropping to record lows(SLV beware).

Central banks will pressure the XAU and HUI with the help of US Treasurer Goldman Sachs Paulson and sell off gold to cap the spot price before the FOMC meeting this Tuesday. Typical ...

Even if Ben does not raise rates this time they will keep POG capped as much as possible prior to the announcement rather than let the POG run free and lose control. Looking at a five year chart on gold one wonders if they really have any control other than a slow bleed ... at some point the patient bleeds out and is DOA!

sio2,

regarding your options question...

i know there are people here who are better equipped than i am but for what it's worth, when i am wrong but i think i'm going to be right, and i am sitting there watching the market move away from me and watching the price of my options evaporate, i will try to stop out, control my loss and re-establish the position using a strike price that is closer to the game.

the trouble with not stopping out is that when the market moves far enough away from you, the sell-off or the rally that you had anticipated will occur and you won't get paid because you're so far out of the money. you want to keep your delta alive.

the other thing about stopping out is that it kind of takes me out of the market and when i'm out, i can re-evaluate my opinion a little more objectively. i think in life we all think a little more clearly when our money is not on the poker table. i've learned to stay alive with options by learning to admit that i am wrong more quickly and stopping out, taking my small loss rather than a big one, helps me to do that.

when you're in, you're part of the experiment and everything is harder to measure.

i don't know if that helps but maybe.

SiO2,

I'll start by saying that I'm no expert on options yet, but I probably know more than most retail traders and can share with you what I do know.

One of the biggest things to be aware of when trading options is the bid/ask spread. That's a negative right off the bat and something the trade has to overcome. If you start switching in and out you will experience a lot of slippage. Given that your DIAs have a lot of time left I don't think that it would be wise to roll it up. The bid/ask spread--a good reflection of the options liquidity--is going to be best/tightest ATM (at the money). The spread gets larger, generally, the further ITM (in the money) or OTM (out of the money). That will just add more slippage for you to have to overcome.

I'm not sure of your knowledge base but I'll add a little more here just in case. You don't have to worry about being ITM with your options. The options contracts will still hold value OTM. The time you need to be concerned about that is closer to expiration. The last 30 days are the ones that really eat away at your options' value especially if they are OTM. Again, you've got plenty of time.

If I can be of more help certainly fire away--especially if you are thinking of putting on more trades. There are a lot of things to consider to protect yourself/minimize your risk and maximize your return. For one, don't buy ITM options unless you are very short-term with your trade i.e., trading the Aug expiry at this point.

I didn't see mtzion's post before putting mine up but that's a very good point as well. I don't know what your loss looks like at this point but I suspect that it's substantial given my guess as to when you entered the trade. Money management is VERY IMPORTANT when trading options. If you had a trading plan certainly follow that and there's nothing wrong with getting out and living to fight another day.

mtzion and BWB, thank you. Yes it helps.

If you don't mind, can you expand a bit on "don't buy ITM options unless you are very short-term with your trade".

I am about 50% in cash, that part has done very well :-) Out of the other 50%, about 25% is in options, averaging down about 30% at this point (holding puts on DIA, QQQ and IWM, with a few calls that have done well, a little GLD). So, I'll still live another day but it's getting iffy.

Really appreciate your answers.

The thing with ITM options is that it takes away from the benefit of options, that being to minimize risk/maximize reward. Yes you get the larger delta, but that can be good/bad. (Delta being the amount your option premium changes with a $1 move in the underlying.) Good if the underlying moves in your direction, bad if it goes the other way.

Stock has a 100 delta (that's what I call it but could also be referred to as 1), if the stock goes up $1, you make $1 for every share.

Deep ITM options can be used to simulate stock. You can usually get a pretty high delta, say 90, but put up less money than if you were to actually buy stock. For every $1 the stock moves in your direction the option premium would move up 90 cents. Of course other things come into play, such as gamma, but I'm hopefully not confusing you.

Buying OTM options gives you a lower delta, but you're risking less money and if the underlying moves in your direction your ROI will be superior to that achieved by owning stock, ITM options or ATM options. Naturally, that's not the whole story either. You can't just go way, way OTM...that brings in other types of risk involving probability. You need to find a good balancing point. A delta around 25 is my recommendation.

There are some other things to consider as well. One of the bigger ones is implied volatility (IV). That determines what strategies you would want to use. In your case, again guessing from when you bought yours you probably bought with high IV. As the market moved back up, IV most likely dropped some and that would lower the value of your options in addition to the lowering from the delta working against you.

ITM short-term trades: I'm not a market maker but I've learned a little bit from some guys that used to do that kind of stuff. This becomes kind of a defensive play. If you want to play something short-term, like you think there will be a move in a few days or week that you want to take advantage of you can go ITM. You might be using Aug options to take advantage of the higher gamma (that's just how quick your delta moves and I'll leave it at that) Basically what that does is if the underlying moves in the opposite direction predicted, you'll still be able to sell back your options for a decent amount, thus lowered risk. If you were OTM + short-term, and the underlying moves sharply against you, you're going to take quite a hit.

The more time you have the further OTM you can go. That's basically why I say ITM is OK for short-term, but I wouldn't do it on something out as far as January.

As for your Jan DIA puts, 30% down isn't that bad considering. (If you were in Aug or Sept you'd probably be down 50% or more.) I usually go with a 50% stop-loss. Also, the further out you are the more tolerance you can show. It is individual though, and everyone has different tolerance levels.

Hope that helps you and answered your question.

Thank you so much BWB. I'll sure take the time to analyze your comments, and mtzion's point of view as well.

This is one of the reasons that makes this site priceless.