My friends know how I agonized all weekend over taking the reversal signal my little system gave me Friday. This morning, I added ATM (at- the- money) Puts with some OTM (out- of- the- money) Calls as insurance. For you Greeks, the delta was weighted pretty heavily towards the Puts. As of this afternoon, the agony I experienced over the weekend has, shall we say, subsided:
Jeff over at A Dash of Insight has written another excellent article, this one entitled “Do Internet and Media Resources Help the Individual Investor?” However, he makes a couple of points which themselves reveal a bit of bias, and I’d like to look at them through my particular shade of Rose-colored glasses.
Jeff points out that Ms. Olick from CNBC overgeneralizes based on what she sees as “typical behavior,” implying that her view on real estate is unreasonably biased. He says that
“Homeowner behavior is a distribution, not a unique point.”
I completely agree, which is why Jeff’s example (his Utopian neighborhood where the homeowners are thriving and confident, the men are strong and all the children are above average) is at least as misleading as Ms. Olick’s.
Homeowner behavior is a distribution– one which has already shifted significantly due to uncertainty about the future value of our homes, and which will continue to shift as this uncertainty becomes a self-fulfilling prophecy of negative sentiment and reduced spending.
Rising home equity has fueled the spending binge which has largely contributed to keeping our economy afloat the last decade. As that equity stops rising (or worse, begins to fall), we’ll get an extreme slowdown in spending as people find their credit card balances bouncing up against their limits (again), but this time discover they’re unable to “cash out some equity,” pay down the balance, and keep on spending. It will take some time for the credit cards to max out (pay $200, charge $300, balance gradually and inexorably creeps upward), so the most serious slowdown in spending will lag the recession in home prices by some months. In other words, the worst is yet to come.
As for the impressive credentials of Mr. Blinder and Mr. Gault, they do imply that these gentlemen are far more qualified to talk theory than Ms. Olick (or me). But it doesn’t make their opinions about the future any more valid than those of a reasonably intelligent person who has taken the time to educate himself, examine the evidence and form a considered opinion.
How many experts were alerting us to danger in 1999, compared to the number using the words “New Paradigm”? How many experts publicly warned of falling home prices before the fact hit them in the head like a brick? (I’m no expert, and even I saw this coming).
As a matter of fact, I’d argue that those same credentials often insulate people from reality, leading the “experts” to ignore even flagrant evidence if it contradicts them. Thus catastrophe sometimes results as these people begin to think of themselves as infallible. Remember Long Term Capital Management? Myron Sholes and Robert Merton, both Nobel prize winners. Two of the smartest guys on earth. Lots of letters behind their names.
How about the multitude of hedge funds which are currently in the process of imploding or at least unwinding? Many of them populated with Ph.D. “experts” from the top educational institutions in the world. Not a single secretary or cotton farmer to be found among them. Does that mean that the secretaries and cotton farmers can’t see what’s going on with the economy and that their opinions about the future are less valid?
Personally, I found Ms. Olick’s (limited) part of the segment to do a great job of making a connection between the jargon of the experts and the concerns of the average person. The expert guests both agreed that the housing slowdown is a fact, and nothing Diana said contradicted them. Here’s her part, as best I could get it from the CNBC video (which I kept having to restart until I finally gave up):
It’s about sentiment. Obviously people feel that their wealth is in their home. For Americans, it’s their biggest investment by far. So when you feel that your home is not worth what it once was, that you can’t pull home equity out of your house like you might have been able to a couple of years ago, you just don’t feel as wealthy as you once did, and that of course translates into consumer spending and how we’re going to spend our money.
We’re already hearing from the homebuilders that renovations are starting to fall… and that dribbles over into places like Home Depot that fuel everything that goes into our houses. All of these things have a ripple effect, so when you feel that your home is not worth as much as it was before, even if you’re not putting it on the market, it definitely has a fundamental effect on how you see your own wealth.
The above being said, I wholeheartedly agree with the premise of Jeff’s article: that the media and much of the “information” on the internet are likely to do more harm than good, particularly by misleading investors into thinking this stuff is easy, and usually with the hidden motive of trying to sell them something. I hate marketing disguised as information or education, and I think Jeff has hit the nail on the head with that point.
Anyone else notice the volume readings on Yahoo Finance this morning?
Let’s see… multiply 18 trillion by the average share price on the Nasdaq, and we must have turned over the entire world’s money supply a few times today. Now that’s what I call a blowoff top! Note that the wimpy NYSE had only traded a measly 13 BILLION shares in the same 20 minutes.
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That was my dilemma. As I wrote (and danced) about last week, my current methodology gave an outrageously strong buy signal Thursday (8/16) afternoon, and I piled into calls which expired the next day. Worked out nicely, but then I was left with the decision as to how to proceed- I had to sell the calls Friday (8/17), but I had just gotten a “buy” signal the day before, and usually they’re good for a number of days.
My two choices on Expiry Friday were:
Wait for “re-buy” signal to get long (basically, a pullback into the swing long), or
Roll the options forward- sell the August Calls and purchase Septembers with part of the proceeds, taking some chips off the table in the process
And now it seems I have the answer to my dilemma:
Monday didn’t pull back to 143, which is the level I had targeted for re-entry. It’s now clear that rolling into September Calls on Friday would have been the best choice, regardless of whether there was a pullback afterwards.
Getcha next time? Soon Amy, Soon.
From Barry Ritholtz’s post of an email from a friend, the “CDO Insider”, explaining what motivated them when they knew they were in for trouble as early as 2003. Very interesting read.
See if anything in this quote sounds vaguely familiar:
The financial distress of debtors can, in turn, increase the fragility of the nation’s financial system–for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of “debt-deflation”–the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America’s worst encounter with deflation, in the years 1930-33–a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
That was from then-Governor Ben Bernanke in a speech before the National Economists Club in November 2002.
(Ya’ll know I just had to)