Home Builders Pessimistic: "Pricing pressure for the foreseeable future"
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CalculatedRisk on Fri, 05/16/2008 - 10:33am (115 comments)
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The truth seeps out...
Throw these guys under the bus already
There are no serious problems.....if you have a positive attitude.
lol, hey, when are these companies going to go bankrupt? they seem very resilient!
--
That is why we need govt programs to create more buyers by giving huge tax credits, especially, if someone wants to buy a foreclosed home. If this doesnt work we need to create a Home Trust Corporation to buy homes until the inventory falls to below 6 months of supply.
Govt needs to put a floor on home prices. We cannot afford to let people's hard-earned wealth disappear and create risk to the financial system failure. No cost is too high to prevent that.
Jas
I live in South Florida and see all kinds of people trying to sell their houses for 2005 prices, thinking that the market is going to turn around any minute. Until inventories come back down to historial averages, prices come back to building cost, major home builders file for bankrupcy and these people get squeezed out of their homes, the market will keep going down.
--
"lol, hey, when are these companies going to go bankrupt? they seem very resilient!"
That would pose threat to our financial system. Therefore, Fed and USG would never allow a big builder to fail. Little fries can go. Get big and get fat if you want help from Fed & USG.
Jas
gotta be a fake Jas,
the real jas does'nt have bone in his body
Said it once, and I'll say it again -- the builders are my ally. They are market makers.
If the house doesn't sell, the builder doesn't eat. They only make money when the house sells, then they build the next one, and the next. They just keep building, and eventually sell each house for as much as they can get. Just as they led the market up, they will therefore lead the market down. In the process, they set the benchmark against which used homes are judged.
A builder's rational tactics to maximize profit is different than a homeowner's irrational hope to get what their neighbor got when they sold two years ago. Its different because the builder will adjust until the market comes to him. Price declines, incentives, upgrades, etc. He has too many units to sell to wait for that one special person to fall swooningly in love with one house and pay whatever he asks.
The homeowner often doesn't have that kind of motivation to sell NOW -- its just a comparatively weak desire to change their scenery. They may be upside down on their mortgage, or they may be a typical baby boomer to whom the house price IS their retirement savings -- The difference between bid and ask is the diffrence between beachfront condo in Boca or swampview for the rest of their days. as powerfull as the builder's motivation is for price discovery, the homeowner's is to avoid it.
If a builder goes under, it's merely less competition to further push prices down. Therefore, I say a blessing on your house, Mr. Toll, et al.
insert < / saracasm >
Oh, puleeze. They just want a bailout. The builders out there who are doing projects that make sense-energy-efficient, accessible to shopping and employment are finding buyers. Why rescue those who want to stick more McMansions in the desert?
Today, Paulson said the economy would recover in the second half of 2008. Bernanke says rate cuts work with a 6 month lag.
I can't wait for more growth prosperity. That's why I'm hoarding canned goods now before prices really shoot to the moon.
Seriously, what is CPI going to look like if Paulson and Bernanke are correct.
hard to go bankrupt when the gubment keeps refunding every dollar in taxes you paid since the beginning of time.
Given the fact that these a-holes probably paid less to uncle sam than I have over the last few years...it should still be enough to keep the lights on and the sob stories coming for a while yet.
United States Senator Jim Bunning, Kentucky : News Center
Senator Bunning's thoughts on why the proposed housing bailout is wrong.
--
"If the house doesn't sell, the builder doesn't eat."
Do you live is a cave? Managers of public builders don't need to sell anything to eat. Hell, some of them made more money in 5 years than they would have dreamed of in lifetime.
You are ignorant of:
The system of the Crooks...
Jas
My balls itch.
IT'S ALL GOOD!!!
The less money people have to spend on housing the more they'll have left for gas & food.[/sarcasm]
Just think about how much energy it costs to move all the construction materials to a house site.
Think about how much energy it costs to run the back hoes and power tools.
Think about how much the materials that go into home construction have gone up.
The builders don't have any cash. They can't borrow much more. And they can't make a profit building homes at these rising costs.
They are just hanging on. The bigger the builder is, the harder they fall.
I feel sorry for small businesses that have no choice but to pay soaring costs for raw materials but have zero pricing power.
Actually, the homebuilders used to be big biz but now they are getting small.
Seriously, what is CPI going to look like if Paulson and Bernanke are correct.
Depends how much more "seasonal adjustment" can be squeezed into the numbers. Or, I guess, squeezed out of the numbers in this case.
The same set of fools who told us in 2005 that prices will be strong for years to come now tells us otherwise in unison. Hmm... No wonder Huebner started buying financials.
A lot of these homeowners had their own in house financing and they placed restrictions on when owners could sell to prevent "speculators". What happened to those lending divisions?
What's sad is that after this "boom" all the US will have to show for is millions of empty homes. There would have been no new industries created, no new infrastructure built nor any significant investment in alt. energy or education.
Spring a bust for housing market
I'm shocked, I tell you, shocked!!!
Who the heck expected anything else?
"Pricing pressure for the foreseeable future"
These morons don't know what pricing pressure is. Down here at the bottom of the food chain, it's defined as 4 dollar gas, a 3 percent COLA, and a new car insurance bill that went up 30 percent for no reason.
And these people think us little guys are going to run out and buy a new house, when we can't afford the old one? Get real!
Oh yeah, I should clarify that the car isn't new, just the friggin bill. The car is 8 years old for crying out loud.
Someone should have passed this information along to Eddie Lampert. He's been buying up builders and... Sallie Mae. I guess student loans are going to be a star performer?
Did some regulator of Freddie/Fannie admit in a speech today that they're bankrupt (liabilities > assets)? Any link?
So what would paying interest on bank reserves do? Is this a carrot to get banks to keep more reserves since sweeps took center stage?
Bernanke Requests Power to Pay Interest on Reserves
Bernanke Requests Power to Pay Interest on Reserves (Update3) - Bloomberg.com
Federal Reserve Chairman Ben S. Bernanke asked Congress to give the Fed immediate authority to pay interest on reserves deposited by commercial banks, seeking to streamline efforts aimed at alleviating credit strains.
Does it mean not only is the Fed going to take all their crap off their hands, we're going to pay them for the privilege?
Just got in from a long drive and checked the DJIA. What happened at 2pm-ish? Again?
You know, my light timer has a better adjustment than that. Has anyone got the goods on this behavior?
Anyone watching the FDIC for Friday clusterbombs?
Prepare for global communism
Fannie Mae, Freddie Mac a `Point of Vulnerability'
Fannie Mae, Freddie Mac a `Point of Vulnerability' (Update1) - Bloomberg.com
(sorry, no good with imbed)
"``With that leverage, the enterprises could pose significant risk to taxpayers as well as to financial institutions and other investors that invest in and count on the liquidity of their debt and guaranteed'' securities, Lockhart said.
OT, here is an update for PE ratios for major indices, as of the close today:
Dow Industrial: 87.1
Dow Transport: 23.4
Dow Utility: 15.7
Nasdaq: 31.5
Russel2K: 66.2
S&P500: 23.8
Given the current Macro outlook, an argument can be made that these levels in the equity markets represent an un-popped bubble, courtesy of Fed easing and government bailouts.
Source = WSJ$ Markets Data Center
California's unemployment rate holds at 6.2%
Schwarzenegger's latest economic forecast, released Wednesday as part of his updated budget, anticipates a loss of 30,000 jobs in 2008. His January forecast had predicted a gain of 106,000.
I think the slowdown in government jobs is going to hit California hardest.
ttm or forward est?
askin,
That's Trailing Twelve Months on those PE numbers.
It'll be interesting to see what happens when the one-half of one percenters decide to desert the stock market to speculate in commodities. Will people feel we're all in the same boat then?
Maybe the "free market system" cannot make it.
How about a "partial free market system"?
Chatter is really picking up on HELOCs. I'm finding several sites discussing sudden termination of HELOC funding facilities. Ml-implode specifically mentions SunTrust and WAMU. Should be a fun 3 months.
So Mishkin says that some bubbles should not be pricked at all, meaning the dot-com bubble in stocks. OK, I can see why that might be - probably because it lead to innovations such as this wonderful blog spot.
But today's stock market bubble is leading to exactly what kind of innovation pray thee?
Just judging by the trend, I would guess that TTM P/E ratio on the Russell 2000 would be about 80-90 by the end of the summer, assuming the index price stays the same.
Small-cap earnings keep deteriorating pretty rapidly.
And there's no catalysts that I can see that will drive small-cap earnings higher the rest of this year.
The worst negative catalyst is the rising cost of capital and the lack of capital availability. A lot of cheap accounting, option and potential dilution tricks have been built into many small-cap companies. Now, they're coming back to haunt.
For a long time, small-caps is where the leveraged speculators have loved to play.
WELLS FARGO = HELOC WASHOUT GROUND ZERO
Lockhart's full of shit. He just got through loosening their capital requirements. Perhaps not entirely voluntarily, since I'm certain he got some encouragement. Maybe that's what he's requesting? Supply the authority to say screw you to the Treasury & Fed.
Cal,
It's actually scarier then you think. In the 90's recession, many fled to gov jobs as the employers of last resort. This time, those jobs are not there. What was needed to be filled was filled early.
The big story no one seems to be paying attention to is how many FTEs are not going to be replaced when the current employee retires. All you people wanting small gov will be getting it but in the ways you want it.
When asking for favors from the Free Market, you have to very, very specific because the markets have a sense of humor and they love play practical jokes on us mere mortals.
Thanks, barely. All I wanted was a hat tip!
Senator Bunting is still throwing curve balls:
"Unfortunately, this bill does more than just create a new GSE regulator. A major part of this bill is a big bailout for irresponsible lenders and borrowers", the Senator writes.
Another Republican speech framing homeowners who can't pay their mortgages as "irresponsible borrowers".
It's OK to bailout irresponsible Bear Stearns and JP Morgan but not any home owners. After all, they borrowed the money didn't they?
deflationary jane, your homepage isn't valid. do you have a blog?
Used to. I pretty much let it go.
ewwww...stinky
however, accroding to the ten year valuation model, at a 3.85, the PE would be fair valued at 25.9, so 23.8 is undervalued, in their opinion(not mine)
so, to the moon!
Given the current Macro outlook, an argument can be made that these levels in the equity markets represent an un-popped bubble, courtesy of Fed easing and government bailouts.
Is it possible that all these Fed "innovations" and interventions will change the game enough so that we'll go through a major recession with only a minor correction in the markets?
CR, what about this gem?
"The end of '08, personally, will be the bottom and the turning point."
Ara Hovnanian, Feb 2008
nanya writes:
So Mishkin says that some bubbles should not be pricked at all, meaning the dot-com bubble in stocks. OK, I can see why that might be - probably because it lead to innovations such as this wonderful blog spot.
But today's stock market bubble is leading to exactly what kind of innovation pray thee?
Innovative lending facilities from the Fed to private banks, of course! Viva la free market!
Oops, that's Senator Bunning. Obviously I like Senator "Bunting" better...
You mean to tell me that more economy distorting, wage earner destroying republican policies won't make a difference?
Which camp do most of you here fall into: A, B or C?
A) The US is not going to experience any economic difficulty like the great depression again. JUST NOT GONNA HAPPEN! The market will always save us.
B) An event like the Great Depression is possible but highly unlikely and it would never be worse than that. That is the floor.
C) An event like the Great Depression is possible and likely. Even greater economic difficulty than the Great Depression. That is not the floor, it can get much worse.
--Just Curious
where are all the bank failures?
askin,
I'm not too familiar with the "ten year valuation model". However, I did a quick google and I think I understand it.
My criticism of it would be this: How useful is that model when stock earnings are transitioning downward, and the 10-year yield is likely to transition upward (as inflation levels would imply)???
The answer is, not very, I would think.
A) The US is not going to experience any economic difficulty like the great depression again. JUST NOT GONNA HAPPEN! The market will always save us.
I think everything will be fine, in equities. The ecnomy can crumble, companies shareprices can go UP indefinitely, especially when they are insolvent. In fact their credit ratings can go straight up too! Solvency doesn't matter until the Fed steps in at the last minute.
"ShortCourage writes:
My criticism of it would be this: How useful is that model when stock earnings are transitioning downward, and the 10-year yield is likely to transition upward (as inflation levels would imply)???"
If it were that easy to predict the changes in 10-year yields, I know a lot of people that would be out of jobs.
Spot inflation levels are a terrible predictor of bond yields.
Sebastian, What did you and everyone in your entire neighborhood do with the stimulus checks I sent you? Just curious if you're enjoying barely's money!
Almost 46 million stimulus payments sent, a few to wrong accounts TaxWatch - MarketWatch
barely, you jest...
The problem I have with those choices is that there's needs to be a choice between (B) and (C). I don't think a depression is highly unlikely. I do think it is possible, but not likely. Likely means more than a 50% chance. That's a bit strong from my viewpoint.
The big story no one seems to be paying attention to is how many FTEs are not going to be replaced when the current employee retires.
Looks like someone's been reading the UC playbook. Why don't you tell 'em about the part where the retirees get hired back as 49%-timers with no benefits?
bond guy,
Fair enough. I'm no expert on bond yields. But with growing government debt levels, two wars in process, bailouts galore, and balooning commodity and food inflation....seems like medium to long term, you'd expect yields to go up, no?
D) There is and will be for evermore a Depression in the blogosphere, but people in the real world will go about their business and won't even notice.
hear that loud and clear,
and the 10-year yield is likely to transition upward
where's zirp-usa to help explain this sceanrio.
and dr doom and gloom(faber) thinks equites could reach 36k, and gold would be at 3g's.
it's all so head-shakingly F***up, that it is the best entertainment going.
also, watch out for the dow indy's hi print due to co's like GM, with virtual negative earnings skewing data.
that's why i would only focus on sp500,imo
Short the long end of the curve is THE MOST CROWDED TRADE on the planet.
Funny you mention UC. The upper 2% get wacked out deals like that but the worker bees are being reduced. The situation is F*ed up beyond measure and until J6P begins to care about it, vocally, then administration will just keep doing it.
I gather you're at UCD. My wife works for UCSB and is active in one of the unions. The stories I hear just boggle the mind.
If somebody rings a doorbell and nobody is there to answer it, does it make a sound?
The problem I have with those choices is that there's needs to be a choice between (B) and (C). I don't think a depression is highly unlikely. I do think it is possible, but not likely. Likely means more than a 50% chance. That's a bit strong from my viewpoint.
ShortCourage | 05.16.08 - 6:29 pm | #
Ditto. Possible but unlikely.
However all it takes to make possible likely is a whole lot of bad policy. That seems to becoming less of a stretch each day... especially considering the recent caving in by Fanny/Freddy.
These homebuilders want to be bailed out: they're obviously exaggerating their difficulties.
4.50 diesel at an average of 6mpg for the semi's, means it costs 75c/mile to fuel the truck.
check national fleets for rev/mile.
last year was about 1.60-1.70.
last years avg fuel was about 42c/mile.
not horrendous , if you think making 1c/ mile is wealth producing.
meat from the kansas yards is about to get real expensive.
Hey Jane, 4shzl:
I'm over at UCSC. Have staff where you are gotten the "voluntary part-time" sales pitch, where you go on part-time for a few months but accrue retirement, vacation, etc. at full-time rates?
I wouldn't touch that with a ten-foot pole. Not when UC is offering it.
You mean START. My wife did that a few years ago and it worked out well. It's actually a legitimate option assuming you can afford the reduction in income.
"meat from the kansas yards is about to get real expensive."
I'd say eat beans, but they come by truck, too.
This pic is great...
truly one world now
My Way
"You mean START. My wife did that a few years ago and it worked out well. It's actually a legitimate option assuming you can afford the reduction in income."
I'm glad to hear that. I don't expect legitimate options from the administration.
Well, they have plenty of illegitimate ones in the pipeline as well. Have you heard about the plan to replace clericals with student workers? Or have you been asked to review your classes with eye toward declaring 3-unit courses suddenly worthy of 4-units? Grade inflation meet degree inflation.
"The less money people have to spend on housing the more they'll have left for gas & food.[/sarcasm]"
tj & the bear | 05.16.08 - 3:42 pm |
tj,
.
I had a big response typed out and then I realised you said "less money" not less money on housing
Chris
"Well, they have plenty of illegitimate ones in the pipeline as well. Have you heard about the plan to replace clericals with student workers? Or have you been asked to review your classes with eye toward declaring 3-unit courses suddenly worthy of 4-units? Grade inflation meet degree inflation."
I'm staff, and we have student workers around here; it'd be a fiasco. Trust UCOP to consider it seriously. On the other hand, my own boss keeps talking about hiring Comp Sci students to develop/configure software for us to save money.
As for the 3-unit courses becoming 4, no, I hadn't heard. But that's just a logical progression of what already goes on. Around here, some sections are both graduate and undergrad; the difference is that the grad students have more assignments. The instruction is the same.
The campus is pushing for voluntary time reductions but my dept would flip if I took it. I'm already working 11 hr days (with no OT pay) just to keep up. The people who are just a few years away from retirement have all decided slow their productivity down, hoping they will be enough of a nuisance to win an early retirement and get out of CA while they still have a chance of selling. It's beyond grim in the central valley.
I'm going to sign off before I get flamed for hijacking the thread. I'll visit you on your blog sometime. I really would like to get a tour of that $30K dogrun one day. ;>)
" . . . .There is and will be for evermore a Depression in the blogosphere, but people in the real world will go about their business and won't even notice."
The blogosphere is the real world, the equivalent of the agora in Ancient Athens. What you're referring to as the "real world" is fat guys driving their stupid gas-guzzling cars to beancounting jobs from the outer suburbs. That "real world," which is a momentary aberration, is ending right about now, never to be seen again.
"ShortCourage writes:
bond guy,
...But with growing government debt levels, two wars in process, bailouts galore, and balooning commodity and food inflation....seems like medium to long term, you'd expect yields to go up, no?"
I'm agnostic on the long term; although Greenspan I believe called for a big rise in rates over the next decade. And hey, could the Maestro be wrong?
I guess my original response was too sarcastic, but inflation lags behind the cycle. In other words, it only starts falling once the recession is over and then continues to fall through the beginning of the recovery. If you were short bonds in 2000-1 on the basis of inflation, it would have been painful.
Oil prices may not follow that script, but the aggregate price level doesn't have to follow oil. Returning to the original topic of the thread, housing, representing the single biggest expenditure people make, has a price that's dropping like a rock.
The bond market is certainly not priced for an inflationary accident. Whether or not I agree with bond market pricing is my own concern, but I cannot afford to ignore the pricing completely.
Toll to bring that beef into New York City at peak hour: $48.
The page you’re looking for can’t be found - The Port Authority of NY & NJ
Eating a burger in a NYC deli: Soon to be priceless.
Remember these guys are lining up at the trough for a piece of the foreclosure bailout bill. To some extent they are just poor mouthing their business so they don't miss out on a piece of the pie.
"meat from the kansas yards is about to get real expensive."
BigRig Driver | 05.16.08 - 6:59 pm
Kansas to each coast...about 1500 miles.
Cost per mile/old/ 1.70 mile
Cost per lb of meat/30k trailer/9 cents a lb.
Even if costs go to 4.00/mi,explain why beef is gonna sky rocket due to transportation costs ????
Yes,I am in the trucking industry...
Chris
"Short the long end of the curve is THE MOST CROWDED TRADE on the planet."
You know, I'm waiting for a signal. No need to get on until it rolls over. When it does it'll drop for a LONG time.
as a land developer who sells to big builders i can say that i'm optimistic and bullish. we're developing 150 lots right now that have contracts with 10% nonrefundable deposits on them which is enough to finish the lots. if they default, we're golden with finished lots with no basis.
oh of course this is because we bought the land 18 years ago for cash.
so either they close and we're rich or they default and we've got zero debt low basis finished lots to hang on to for whenever the time is right even if it is in ten years.
as well
i live in an in-town neighborhood in a small house with walking distance services, world-class dining and entertainment, schools, etc.
oh but i also have planted a 128 square foot 'depression' garden along with the container garden to feed our family when the dollar becomes worthless.
seems like food and real estate should hold its value even in a barter system eh?
some parts of what i said were a joke some were not.
can't wait til my monday morning conference call with the regional director of the big builder that has our lots under contract. they're supposed to commit 6 figures to landscaping development. we'll seee.......
barely,
which part of the trade are you talking about? i was confused by the first comment on the crowded trade myself.
was he saying that thinking yields are going to go up is the most crowded trade around? therefore, they should drop? the yields that is?
"oh of course this is because we bought the land 18 years ago for cash."
dc1000,
Speaking of that...After taking the parents to dinner we swung by a spec home a local builder has here. Pretty nice place for 129k. How could he sell so cheap??? Yep,bought all the lots pre runup at between 500.00 and 3k...The salesman said they were actually busy. Mainly snowbirds who don't wish to deal with older homes.
Chris
What next, the head of major banks saying we are just beginning an ugly recession? Oh wait, that was earlier this week before the stock market jumped up 2% and home builder stocks surged.
I feel lucky to live in these times. It is highly entertaining. And confirms my theory that people are stupid.
" they should drop? the yields that is?"
That's what Gross, PIMCO, is betting on. The problem is, you always have the threat that on any crisis money could come pouring back into the bond market. The long end should be immune, if inflation remains elevated. At least that's how I see it...
The yield at the long end should scream. The bonds should get crushed.
"barely writes:
" they should drop? the yields that is?"
That's what Gross, PIMCO, is betting on. The problem is, you always have the threat that on any crisis money could come pouring back into the bond market."
Gross hit the news wires last week arguing that bonds are overvalued (yields too low). He may or may not have been talking his book, but he presumably would not have been positioning for lower yields (higher prices).
thats why all these comments are confusing.
so people are saying that the most crowded trade in the room is SHORT the long bond i.e. betting yields are going to go up?
so with a massive short interest in the long bond, we should see some nice short burning rallies to drive down yields?
damn i hope it happens around dec of this year when my perm loan resets on a commercial center in dc
jackk writes:
where are all the bank failures?
St. Louis Fed: Series: BOGNONBR, Non-Borrowed Reserves of Depository Institutions
They happened some time ago. You are in the presence of the walking dead.
Rich, what do you think of using ProShares Ultra-short Lehman 20+ year Treasury ETF to short long term bonds? Do you know a better way for a small investor to short long term bonds?
Thanks in advance.
I think he meant the 'most crowded trade' imo, was
everyone is waiting in the foyer to be enter the most crowded trade.
there's really no chance for the trade to happen(imo), with long yields even going back up to 6-7% , just based on the sheer size of the market. were running $500billion in interest payments in '08 as it is.
Kansas to each coast...about 1500 miles.
Cost per mile/old/ 1.70 mile
Cost per lb of meat/30k trailer/9 cents a lb.
Not to nitpick - but the cost to the East Coast is probably almost twice that - not because your numbers are wrong but because the refrig trucks return from the East Coast to Kansas empty - or approximately so. Too few consumers in Kansas & nothing grown/raised in the east going west (or very little).
West Coast not so much - take beef out west, bring produce from Central Valley & So Cal east - even if they don't stop in Kansas - the produce can still go farther east & find a market.
The East is sort of an island.
generally the east being east of the delaware river. your right about that. most deliver to halls in jersey or some cold storage variant. or to the produce market in hunts.
then empty to pennsy for a kraft, nestle or other junk food product.
The kansas is as you said, very little in-haul to the yards, unless your lucky to get a beer run. (remember, wal-mart does'nt run beef).
so most loads out of kansas have deadhead miles of 300-450 miles added on. most guys, with 4.5 diesel, would pass that up, if the broker offered it.
ps. i did'nt say sky rocket, just real expensive. from a margin perspective.
4shzl - What evidence do you have that "short the long bond" is a crowded trade? Shorting bonds is not easy for the general investor, until quite recently. There are a only couple of mutual funds like the RYDEX inverse 30 year (RYJUX) and another whose symbol escapes me.
I'm not saying you are wrong, just a little skeptical ... seems to me that a more crowded trade these days would be long commodities or short solar stocks.
I am certain he said everyone is long bonds. Even the long end. A crowd. There should be a rush for the exits once the fed appears ready to hike. Even now there seems to be money leaving to chase risk in equities.
There are enough liquid bond ETFs to short. TLT - 2mm sh/day.
Pricing pressure is related to the mechanics of releasing pent up energy, i.e, these greedy bastards that over built every field in America need to have a fire sale on prices -- if they want to stay in business during the next 5 years; otherwise, more pressure will build (no pun there)!
Likely means more than a 50% chance. That's a bit strong from my viewpoint.
Likely? I prefer the words "almost inevitable".
Hovnanian prices $600m private placement at 11.5%:
Expired
Also a cryptic reference to a reduction in their revolving credit line....
tj, sometimes I feel that way.
But then I see the lengths to which the Fed and government will go to prevent it. They can prevent it, if they're willing to bring on massive inflation and destroy the value of the dollar.
SC,
Prevent it? That'll hasten it. I've gamed it both ways, and the end result is still the same.
tj, I wish I could be sure, one way or the other.
This thread is dead, so I'd love to hear your scenario of how the gubmint intervention will play out into a depression, and what kind of timeframe you expect.
"central_scrutinizer writes:
4shzl - What evidence do you have that "short the long bond" is a crowded trade? Shorting bonds is not easy for the general investor"
I know this thread is dead, but this is right up my alley.
The consensus position was to buy short-dated bonds and sell long-dated bonds (i.e., position for a steeper yield curve). Those positions absorbed losses big time over the past month as people tried to get out of the trade.
Retail investors are a minnow as direct investors in the bond market. I have worked in shops were we routinely dumped a billion dollars of Treasurys in a day as a result of asset allocation shifts. Some prop traders would dump $2 billion in 10 and 30 year Treasurys in a few minutes to see whether they could blow out people's stops on a quiet afternoon.
However, retail investors are the biggest indirect investor in the bond market. Check out the Fed's Flow Of Funds report. The household sector was routinely issuing nearly $1 trillion a year in mortgage debt. That make the institutional investor's billions look like chump change.
So if retail investors want to short the long end, go out and buy a big house with a 30-year fixed rate mortgage. I'm sure there's some blog somewhere that will give a nice outlook for the housing market...
"[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times...
NAHB Chief Economist David Seiders"
And yet if your only source of news was the radio, all you would have heard, from local network affiliates to NPR, was that housing had a surprisingly strong rebound in April with housing starts way up over March.
bond guy,
Thanks for the explanation, very helpful.
I'm one of those minnows you describe - I recently nibbled on some RYJUX in my IRA. My time horizon is 20 years plus. Of course, if it goes up more than 50% I'll sell to take profits.
I just don't see how long bond rates are going to stay around 4.5% over the next 10-20 years. This country is in too much debt and will need to flood the market with supply to pay for all the shit we can't afford, like wars, housing bailouts, and medicare/social security insolvency.
That would pose threat to our financial system. Therefore, Fed and USG would never allow a big builder to fail. Little fries can go. Get big and get fat if you want help from Fed & USG.
Jas
Jas Jain | 05.16.08 - 3:19 pm | #
Jas, no builder poses a systemic risk to the system if it failed. They simply are not that big, even at the peak the market cap of the whole industry was less than $100B.
"central_scrutinizer writes:
I just don't see how long bond rates are going to stay around 4.5% over the next 10-20 years. This country is in too much debt and will need to flood the market with supply to pay for all the shit we can't afford, like wars, housing bailouts, and medicare/social security insolvency."
I am used to working with long investment time frames, but even I couldn't justify a 10-year investment horizon to my superiors. (Although you do look at long time frames when doing liability matching - but in that case you are deliberately avoiding making any decision about the direction of rates.)
Gross argued that bonds are heavily overvalued, and he knows a lot more about the market than I do. But one caution. I know a lot of people that offered very convincing arguments that Japanese Government Bond yields below 2% were unsustainable - in 1998. (For those who don't have the data handy, they've been below that level since then.) Long bonds in any currency are very hard securities to value; I have very little conviction trading them in either direction.
bond guy,
I agree. It's too complex to forecast where long bond prices/yields will go. However, if their yields do not go up, it will probably mean we are in an environment of no-or-negative economic growth.
So going way back up the thread to my comment about using the "ten year valuation model" to determine if stocks are fairly valued... I just don't see that model as valuable in guessing whether stocks go up from here. If ten year yields go up, the model says that stocks should go down (if I understand correctly). But I think the only reason ty yields don't go up is, well, a serious recession/depression. And what would stocks do in that environment?