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-- Posted Monday, 12 May 2003 | Digg This Article
We received a note yesterday from a Colorado subscriber who sees Denver’s rapidly unfolding real estate bust as a warning of potentially far bigger troubles for the entire U.S. He notes that residential building permits for the metro Denver area were down 30% in March; that existing-homes-for-sale inventory is at an all time record; and that closings in the first quarter were down 13% from last year. “Denver is usually considered to be a demographic bellwether for the country, so I'm sure many other cities have the same housing/construction glut. I'm putting my arm around the shoulder of the housing industry and sadly waving good-bye to the housing bubble.” Perhaps our correspondent will be right. But gloomy as we are on the economy as a whole, we hesitate to infer that Denver’s incipient real estate disaster will necessarily play out nationwide, or very soon. One reason is that Denver’s economy is probably not so typical that it should be regarded as a true bellwether. Granted, the region is more economically diverse than it was before the oil-patch bust of the late 1980s. Unfortunately, the job market is heavily dependent on a relative handful of employers who have been hit especially hard by this never-ending recession, including Qwest, United and, in my back yard, Sun Microsystems. On further reflection, although a real estate bust locally remains an imminent po ssibility, we must allow for the possibility that it will take more years than most pessimists are able to imagine for a softening national market to turn into disaster. Fat Spread Cushions Our expert's expert, Howard Hill, notes that spreads have widened in recent months to favor mortgage-backed securities, presumably because mortgage paper is perceived by many investors as the safest and best place to be right now. Hill notes that mortgage lenders can lock in fat yields by working the spread between what they charge a customer for a loan and how much they can sell the loan for to Fannie Mae. Typically, says Hill, a $200,000 mortgage will sell for $202,000 - $203,000 via a Fannie Mae 5.50% coupon. Out of the implied $3,000 capital gain, the lender will spend just $500 hedging the 60-day risk incurred between the time they make the loan and when Fannie buys it. ($500 is about how much it costs to buy a 60-day put option on a 5-year interest-rate future.) I asked Hill how much stress it would take from a falling dollar to cause mortgage rates to rise significantly. His reply was that only a massive flight out of dollars would do it -- on the order of trillions of dollars, not m ere hundreds of billions – with the euro moving north of 150 euros/dollar and quarterly funding by the U.S. Treasury exceeding $100 billion. This will someday come to pass, I fear, but Hill sees it happening over a period of years rather than precipitously, with the slow implosion of residential real estate reaching critical mass in about 4-5 years. He says most other forms of debt will be downgraded long before mortgages, simply because, at the level of individual, even if we are stiffing all of our other creditors, we will continue servicing our mortgages so long as we can beg, borrow or steal the amount needed to do so. In the investment world, says Hill, “Nothing on God’s green earth is safer right now than lending against a person’s home,” and long before the mortgage market sours, he adds, we’ll see corporate borrowing rates soar and huge lenders like GE Capital (!) go belly up. Home Builders Defy Shorts Meanwhile, as Hill notes, anyone who shorted home builders’ shares because of the economy’s overall weakness has been getting reamed, since housing still appears to be the best game in town. With short-term rates at 1.25% and mortgage rates between 5% and 6%, for housing lenders there is an implied 200% return on capital after hedging. A dollar falling so precipitously as to trigger heavy selling of five- and ten-year Treasury paper might unsettle the mortgage markets, says Hill, but un less the shift out of dollars is of tectonic magnitude, the net effect on the housing loans could conceivably be no worse than reducing mortgage lenders to a still-incredible 100% return on capital. [The + symbol means we have an open position, while $ means there is actionable advice.] | | 125% TUITION REIMBURSEMENT PROGRAM | | 125% TUITION REIMBURSEMENT PROGRAM: Through our partnership with Terra Nova Online, MarketWise Trading School provides its graduates with the education necessary to adapt to these volatile markets, while taking advantage of our Tuition Reimbursement Program designed to provide 125% of the graduate's tuition back to them. click here |
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Gold
$ JUN GOLD (351.90): June gold finished the day precisely on the lower of two hidden pivots we’d proffered after failing by an inch to get past the higher, 353.70. That number is still likely to offer resistance, so we’ll suggest that you offer a single contract short there, stop 354.10, good in the first hour only.
GoldCorp (NYSE:GG)Quote - Options - News - Profile - Message Board - Website
+ GG (11.46): We hold 400 shares for an average 7.20. The lowermost pivot we’d provided, 11.57, stopped yesterday’s rally to the penny. There are two more such resistance points above -- at 11.61 and 11.83 – as well as conventional resistance near 11.50 from a prior peak. In short, the stock has its work cut out for it over the near term, and even if it blows through all of the obstacles noted above, GG will still face daunting resistance between 12.50 and 13.50.  
DURBAN DEEP (NasdaqSC:DROOY) Quote - News - Profile - Message Board - Website
+ DROOY (2.36): We hold 200 shares for 2.41. DROOY is hovering above a hidden-pivot support at 2.16, but if it exceeds that number by more than 3 cents, we’d infer it’s on its way down to whole-number support at 2.00. If the stock delights to the upside, we would pre sume a minimum target of 2.55 over the near term.
+ RANGY (13.04): No change. We hold 200 shares for 10.35. We see little upside potential over the near-term, although there is not much to impede the stock between here and 14.  
Royal Gold (NasdaqNM:RGLD)
$ + RGLD (17.47): We’re risklessly long the July 17.50 – May 17.50 calendar spread eight times. In trying to sell June 17.50-May 17.50 calendar spread, we would effectively be rolling into the July 17.50 – May 17.50 call spread. Today only, offer the spread for 1.10. (Note: This would become easier if the stock drops back toward 17.50, since the May’s would lose more premium than the Junes. In fact, our outlook for the next two days is somewhat bullish with a minimum upside target of 19.85.)
 
DJIA (8726.73): By slightly exceeding the highest of three immediate upside targets yesterday, the Dow implied it has sufficient energy left to reach a bigger-picture target we’d proffered at 9035. If and when the blue chip average gets there, we’ll want to back up the truck and load it with out-of-the-money put options. $ JUN E-MINI S&Ps (932.25): The peak of Monday’s nearly 15-point rally came within a single point of our minimum target, 947.75, a hidden pivot, but it was still 0.75 points away from our short offer, so no position was taken. The pivot still must be surmounted for the S&Ps to signal further strength in the days ahead, but we will no longer try to intercept there, since the resistance has been weakened somewhat by yesterday’s close encounter. (Viewed even more idiosyncratically, one might say that we no longer have the element of surprise working in our favor, since, as of yesterday, 948-ish became “ev erybody’s” resistance, rather than the voodoo pivot whose precise location only Black Box subscribers could have anticipated.) JUN BONDS (116.27): The futures are bound for a potentially very important top at 118.09, whence beckons a major hidden pivot. The longer the bonds take to get there, the more bullish it will be for stocks, albeit temporarily. (Note: The approach to the target is occurring quite a bit more quickly than we had anticipated.) OEX (477.96): According to our earlier projections the OEX is now a lead-pipe cinch to reach a minimum 484.93. You can try to go short there by bidding 1.25 for two May 480 puts, provided 1) the index is trading 485.00 or lower, and 2) there are at least three hours left in the day session. Our bid is pegged to an 18.40 volatility – a pretty good bargain, provided you do not enter the trade toward the end of the day. This is expiration week, after all, and May options will be shedding premium by the hour.) $ + QQQ (28.84): We hold twelve June 30 calls for an average 0.33. Once again, offer twelve May 30s short against them for 0.20, day order. We also hold 24 July 23 puts for an average price of 0.175. Continue to offer eight of the puts to close for 0.35, good-till-canceled. NASDAQ E-MINI (1161.00): Third down and just inches to go. Yesterday’s high of 1162 fell a mere seven points shy of our longstanding target, 1169.00, which remains viable. We wouldn’t advise trying to go short there, but you should nonetheless be aware that if it’s exceeded by more than a point within 15 minutes of first being touched, the f utures will become a lead-pipe cinch to reach a minimum 1180.00, another hidden pivot. *** $ + IBM (87.55): We hold eighty July 105 calls for an average 0.13, and are offering 80 June 105 calls short against them for 0.10, g-t-c. IBM stalled just 36 cents shy of an unadvertised 89.62 pivot, but if it can get through that number today we can be fairly certain Big Blue is bound for a minimum 90.47 immediately thereafter. FNM (72.45): The stock has been mincing around within a two-point range for the last 19 days, so we’re not going to go out on a limb today with an interesting prediction. $ + C (3939): We hold eight May 42.50 calls for 0.10 and are offering eight May 45 calls short against them g-t-c for 0.10. Let’s keep our fingers crossed in hopes that the scuzzballs who control this hoax can push past heavy resistance near 40 today. They’ll need to, to get us filled on our offer. (If not, we’ll close out he May 42.50s tomorrow or Thursday rather than try to spread them off.)
KLAC (43.63): No change. Our minimum upside projection is still 44.41. We woul d suggest shorting there with a 3-cent stop, but only if the three cents risked is profit made being long up to the target. EBAY (94.74): We said we’d remain uninvolved unless eBay swooned, but swoon it did yesterday, leaving us to spectate. We’ll attempt nothing new today either, since we can discern no vine-ripened opportunities.
-- Posted Monday, 12 May 2003 | Digg This Article
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MarketWise Black Box is published on weekdays 240 times per year. Copyright 2003 by MarketWise. For further information please go to www.marketwise.com. All information was gathered from sources believed to be reliable The risk of loss in futures, stocks or options can be substantial; therefore only genuine risk s should be used for such trading. Futures, stocks and options may not be a suitable investment for all individuals, and individuals should therefore carefully consider their financial condition in deciding whether to trade. Commodity option traders should be aware that the assignment of a short position will result in a futures position. Past profits are not indicative of future profits.
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