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Sunday, October 2, 2022


Yentervention Wednesday – Kan Baffles Bulls


As we discussed yesterday, it was meet the new boss, same as the old boss in Japan as Naoto Kan’s re-election sent the Yen to new highs as he was considered the least likely candidate to back intervention.  Well surprise, surprise this morning as Japan officially intervened in the FOREX markets and sent the Yen down a full 2.5% as they used their Yen to purchase an undisclosed basket of currencies.   

Since the Dollar is up today against both the Pound ($1.55) and the Euro ($1.29), we can assume the dollar is one of those currencies and demand for Dollars means upward pressure on rates so that should be the end of the TLT bounce for the moment.  Stock boys want bonds to die so the money can come this way and bond boys want you to fear the stock market so you will let them hold your money (and charge you fees) at ridiculously low rates of interest.  That’s they Yin and Yang of the markets. 

Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency.  The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.

We’ll see if the stronger Dollar today puts pressure on commodities but we’re in pretty good shape as this rally, for a change, has not been led by commodities as the market is now flat to the August despite an 8% drop in oil prices (see USO on chart):

I often complain about rallies that are led by Financials and Commodities as those are things that suck money OUT of the economy and are not long-term drivers of growth.  The entire 2006-7 rally was this kind of rally and I bitched about it all the way up.  We also had housing back then, another type of commodity, but that’s so dead now it’s hardly worth mentioning, is it?  Actually housing is where we used a lot of commodities like lumber and copper etc.  33 months after the onset of the Great Recession, new home sales are still down 70% and non-residential construction is down 36% – that market is dead, dead, dead

We get housing starts next week but who really cares?  Is it going to be 525,000 or 575,000?  I can tell you one thing, it’s not going to be 2.1M, which is where we peaked out in 2006 and it’s not going to be 1.4M, which was around "normal" in the 90s.  While many bears will latch onto this number and tell you how it spells DOOM for the economy – I’ll give you a couple of reasons why it’s a GOOD thing.

A) Commodities – they get expensive when housing sucks them all up and that makes the cost of goods more expensive for consumers as well as for manufacturers.

B) Savings – With an average price of $250,000 and an average deposit of 10%, each new home sucked $25,000 out of savings accounts – 1.5M less homes sold means $37.5Bn more money in savings accounts.  Ad in mortgage fees, moving costs etc. and you can double that amount.  Also, it pays to consider the vast number of people who have simply stopped saving for a new home as it is no longer considered a goal for many people – that money can be used for other purchases or to pay down debts.  If the average family saved 3 years to buy a new home than that’s a very large amount of money that has been re-directed. 

C) Loans – If they are putting down a $25,000 deposit, they are borrowing $225,000 from the bank.  That’s a demand for $337.5Bn per year of bank capital.  Less demand for money for homes means more money available (in theory) for businesses to expand (and hopefully hire).  

D) Cash flow – Hard to quantify but generally, people who stay in homes can afford their mortgages, the stress comes when they upgrade to bigger homes and have to make bigger payments.  

To some extent, the same thing applies to the 6M cars per year that are not being bought as well.  Of course, cars only last so long before they begin falling apart but so, to some extent, do homes.  At 500,000 homes a year we are only replacing the average US home every 205 years.  Is your home likely to last 205 years?  If not, then at some point, people will HAVE to start buying new homes again.  If we assume 1.5M homes a year is a proper replacement rate (once every 73 years for 110M homes), then we can use the above chart and estimate that about 1.5M homes too many were built between 2003 and 2006 while about the same 1.5M too few homes have been built in the past two years.  This is called "working off excess inventory" and it’s very, very normal and explains whey the Case-Shiller Index has found a bottom of sorts recently:

Interest rates are the real wild-card here as people don’t buy homes, they buy mortgages, so low home loan rates (remember that low demand for money) makes homes seem more affordable and it remains to be seen if buyers really have the stomach to pay 70% of peak home pricing if rates head back to 6%.  At 4.5%, a $200,000 mortgage is $1,266.71 per month, at 6%, that $200,000 jumps to $1,498.88 per month – a 15% increase.  So, we can look at the above chart and knock 15% off if rates had not dropped so significantly during the housing bust and that puts the chart at 136.  7.5% mortgages can drive us down to about 115 so it is not out of the realm of possibility that an event (like the Yen being devalued to the dollar, for one thing) can still drive rates up and drive housing prices another 15-30% lower. 

This is what we consider to be one of the biggest overhangs in the economy because we are not creating enough jobs to create demand for homes and every day we risk an event that raises rates and the banks are still on the hook for 3 years worth of home loans they made at higher prices than those homes are likely to fetch today and that deficit in their loan to value ratios can get MUCH worse very quickly if we do have a rate event and that line drops from 160 to 130 to 115, which would put a whole decades worth of home loans deeply in the red on the banks’ books (if they ever actually mark them that way, of course). 

Don’t be fooled by the recent bounce in financial stocks, Louis Navellier warned yesterday. "High foreclosure rates and low lending rates are acting against the big banks," he says, urging investors to sell these 11 famous financials: STD, BAC, BCS, LFC, C, HBC, GS, JPM, LYG, RBS, WFC.  This morning we got the MBA Mortgage Application Report and that was down 8.9% for the week, despite the fact that the 30-year fixed rates fell from 4.5% to 4.47%.  When I met with the Treasury last month, we discussed rates and (we are not allowed to be specific) I got the impression that they were not all together against the idea of seeing rates drop to 1% if they thought it would actually boost housing but, in fact, they don’t.  That foreclosure rate and lack of new buyers is going to keep housing down for quite a while but, as long as it doesn’t get worse, as I said, not such a bad thing

This overall uncertainty is why we held onto our hedges yesterday as we were only testing the top of our range, so we expected some pullback anyway.  We took advantage of the morning pop to add SQQQ and TZA hedges and we’ll be out following our 3 of 5 rule if we can get over our lines but seeing the Russell struggle to hold the 2.5% line at 650 made us a little dubious as to whether they would be joining us at the 5% mark.  Oil failed to hold $77.50 and copper failed to break $3.50 and gold went higher – all things to make us nervous but not so nervous that we didn’t like ARNA on the dip as a fun, risky trade idea that will make or break on Thursday, when the FDA makes their decision. 

We set up a hedged play on ARNA that pays 1,566% at $5, which is a fun way to gamble on silly biotech stocks.  The idea of a play like that, of course, is not to put 1% of your virtual portfolio in and hope to make 15 times your virtual portfolio on one trade but to put 0.01% of your porfolio and make 15% if it works out.  That way, you can afford to have 10 misses trying to make 15% before you are out even one tenth of one percent of your virtual portfolio – we see trades like these at least once a week so it’s not like they are a rarity. 

Asia was mixed this morning with the Shanghai getting hit for 1.3% but the Hang Seng held flat at 21,752 and that 22,000 line would be bullish for them.  The BSE hit 19,502 with a 0.8% gain and the Nikkei was thrilled with the intervention and jumped 2.3%.  Europe is down about half a point ahead of the US open as protests against austerity budgets broke out in Romania and the EU proposed a ban on short selling that made the markets nervous.  

Also making everyone nervous is our miss on Industrial Production (0.2% vs 0.3% expected) as well as Capacity Utilization (74.7% vs 75% expected) and the Empire Manufacturing Index for September also fell short of the mark at 4.1 vs 6.4 expected and 7.1 prior.  If that kind of data keeps up, then the August "recovery" is going to start looking like a bump on the way down.  However, new orders were the bright spot of the report, up 4.33 vs down 2.71 last month while employment ticked up slightly and prices turned higher.    August Import Prices were up a surprising 0.6%, doubling expectations.

We expected to test our 4% lines today and we’ll see if they hold up at: S&P 1,112, Nas 2,288 and NYSE 7,072.  The Dow has yet to give us 10,608 nor has the Russell seen fit to test 660 but these are the expected pullbacks off our 5% lines and the other 3 have tested the tops and how they behave on a pullback is going to be critical as we decide on our stance into the weekend.  It’s very had to make any conclusions on a day where there has been such a massive currency intervention and I would take all early moves with a huge grain of salt. 



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 Phil, futures are not liking the Yen intervention. Most likely BOJ will intervene again. Will the equities react the same way => go down? Should we get out of longs till this is over?

Phil, sorry for the basic question, but can you please explain how  the "demand for Dollars means upward pressure on rates"?   I definitely see that you are right by looking at TBT pre-market, but I just don’t understand why it works this way.  If foreigners want more dollars, why would interest rates be pressured to go up?

Phil, thanks so much for your discussions and articles on the housing racket – too late for me, but I sure as hell am sharing them with my kids and younger friends.

Thanks for your ONTY view. I think I will hold to expiration unless it goes below 3.50. Would have replied sooner but live in Asia and went to bed.

Grrrrr… hibernation is over!

anybody have any thoughts on Scottrade or Options House for a broker….TOS giving me problems and I might have to move….

Leon, BOJ recycles dollars into front end of the market, hence the steepener trade is on and front ran by hedge funds. This is held in check by QE2 anticipation.  Volatility in long term bonds should pick up here with a two way action

"Is it going to be 525,000 or 575,000?  I can tell you one thing, it’s not going to be 2.1M, which is where we peaked out in 2006 and it’s not going to be 1.4M, "

Trillion dollars worth of gdp?

Hi David good call on SVNT for the once who did not jump off the train

Matt – you always say that too early and then lloyd comes out and sticks it to ya ! I’ve noticed a strong correlation 🙂

I am going to be moving out of ARNA shares today FWIW.  

David   Great job on SVNT   That was fun  🙂

jromeha, if I could nail every top I doubt I’d be hanging out on this board.  Do you know someone who can?  Take it for what it’s worth.

Good Morning!   David, great call on SVNT!

Anyone know of a fund that tracks copper? Like UNG is to NG or USO is to oil?

September 15th, 2010 at 7:07 am | Permalink  
Good morning Phil,
APPL hearing lflantheman advice I would like to have your opinion on the complete deal sold originally the APPL spread Jan 5x 280c/175p 9.48/14.49  subsquently I rolled 3 of the Jan putters up to 220 for a further credit of 3.00.
I am thinking of rolling the 280 caller to 310c costing me the same what I received for the caller and possible rolling the putters still higher. The 280 jan putter as lflantheman  sugested looks very high to me as I expect they will get some more competition from RIMM and Nokia. Just to give this spread further protection I hold as well 2 x jan12  185 putters short which I sold for 17.12 . Thanks for you opinion.

Rainman – check out JJC or DBB

Thanks jromeha!

i have a large position in XOM as well so i noticed your message to Phil yesterday–can you please explain what you are trying to do–i don’t understand if you sold the puts how you are going to get the stock if the puts expire out of the money?? thanks i might like to join in the fun if i can understand what you are doing–thanks

I have accounts at all three. While TOS undoubtedly has the best analytical tools, they also have the highest commissions of the three. OH has reasonably good execution, and is dirt cheap. For a 100 contract trade I’ll pay about $24 at OH, while at TOS it will be $100. So, like several other people on this site, I’ll frequently do analysis at TOS, then do the trade at OH. At Scottrade I use the Scottrader Elite, but this site is not set up for options trading. They have their OptionsFirst platform, which is really an agreement with an outside company to provide this service to ST customers… this I have not used. I do 80% of my work on OH. Hope this is of some help.

Ha, another why the heck not squeeze the shorts pump job !
Bought some TZA here.

Pharm – when does the Meridia decision come out? How much should this really effect ARNA? I doubled down yesterday at 4.06 but have this sinking feeling that Meridia will be pulled and it will drag ARNA down another 10-20%….

Quad Witching this week right?  This tight little range.

Sorry:  Maybe we just chop around this tight little range for the rest of the week.

Good morning, some computer issues this morning.

IWM  63.33, 63.87, 64.35, 64.96, 65.40, 65,83, 66.39 and 67.09

Cap/ I hear you but it is expected. They have to defend their levels until the end of the week…then we may go down to test the bottom of our range again.or break up out of it. I am more inclined to believe in scenario #1. Buying TBT Oct puts here.

VLO / TSO down 2+ %

What do you think about ATHR?  It seems promising long term. A buy/write at $25, selling the JAN 11     $27 C and  $24 P
for $4 .

Yesterday before close ja sale ARNA  jan2013 10C for 2,6 and today buy jan2013 4C for 2.5 Its free gamble 😀

Pharmboy (and those in ARNA)
ARNA – I recall you saying that your avg. cost was in the $2.8x. I also read above that you plan to get out tomorrow. Do you not see ARNA going back and trading in teh $2.5-$3 range if the FDA decision tomorrow is essentially ‘go do more study’?
Right now, one can sell Sep $4 Puts for $1.20 or even Sep $3 Puts for $0.65 – perhaps a better bet than keeping the ARNA shares?

Phil –what do you think of:
1)either selling the TBT December 34 Put for $3.00 or buying the TBT at about $32.80 and selling the December 36 call for $1.20
thanks and thanks for your answer om UEC yesterday

It’s amazing.  There’s always a scam.  Why can’t people just keep it legitimate.

Housing / Phil – yup, that article was a big factor drawing me in here. I’ve lived in 3 houses, starting with a starter and moving up a bit each move, done 15 year loans each time – currently 8 years into one from 2002 (5.875%, balance of 180k). The techniques of splitting the payments or tossing in some extra are good, especially on a 30 year, but what blew me away was the difference between renting and owning. This is the only place I’ve seen an honest & full comparison.

Phil and JBur,
Thanks….I’ll see what Scott has to say…also check out OH as well

sundevil- When you sign up for Optionshouse, be sure to tell them your investment objectives include speculation.  (That is what you have to do to be able to sell puts and calls without 100% cash backing)

ARNA – I see the Meridia data as a drag and a blessing (less competition).  I think some of the same panel members are on ARNAs panel, as well as cross over for some of them from VVUS.  Now that assumes that ARNA gets a positive vote.  Everything here is a gamble now.  The efficacy as I have said is Yes (slim or not), by FDA guidelines it is +.  All blood data (glucose, LDL, etc) are good.  CNS is fine (from my point of view).  Cancer, well, that is a big question, but not unheard of in the CNS and other areas of a drug.  Is 7X good enough?  Monkey tox shows no signs of cancer after 1 yr of treatment.  ARNA tried to find the reasons for the cancer…and could not.  There in lies the question.  Do the risks outweigh the benefit?


The next question is What are they worth? $1, $3, $5.  To me, IF they do not get approval, they are work <$2.  That does not mean that another trial for Lorc would not change the game, but that is a long way off.  ARNA has another trial ongoing with 600 diabetics!  If that one comes back better than the other two, then they have a game plan.  Also, Eisai put in money ($50M gamble) – and don’t think the Japanese did not due their homework!!!!!!!  They are VERY conservative.

Fed pumps more money into the markets..todays POMO results..just about 4b

Phil/Scam:  In your post, interest scams and how to avoid them.


Thanks Phil You got the APPL play right I just do not like to see the 280 caller going ITM but you right sit back and wait.

Thanks for the help on TBT and XOM

Phil, The Mattress play is quiet for the last few days I have rolled all my Jan 11 long putters to 104 and I am selling during the down side of the mornings and afternoons Sept 30 104 putters averaging 1.15. sold 60% of the full cover.

Phil/Pharm/ ARNA
Thanks Phil for your no nonsensical approach. Yesterday someone saw value at $4-$4.50 in Arena.
And this someone bought big. This is why I am hanging on into this trade.
Ohhh! What a nice push….on no volume 🙂

Bought MSFT Oct 25 straddle for 1.33 and sold Sept 25 straddle for 0.38 (in ratio 5:4) to play for decay of Sept straddle. Roll into next week’s straddle after decay, or out if a wild move eats up all profits.

"we’re doing all this with our biggest driving engine deader than dead. " Excellent point but we cant discount the trillions spent to keep it all together to this point. O well, its just money after all  🙂

MA exit stage left, what a mindless lucky trade..caught myself contemplating 212 but that would be greedy

Based on the commentary, are you leaning against financials? I hold a bullish spread on C and was looking to add a buy-write on BAC…

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