Houses All Around With Nothing To Buy

I looked at some housing prices this weekend.  I'm not really in the market but I like to keep tabs on where things are.  I have noticed that there are a lot of new "For Sale" signs going up in and around the Pasadena area.  I think most of this is people getting ready for the summer selling season.  I think a lot of people held off trying to sell in the weak market that we have had in the last year but people can't wait anymore so here comes the inventory.

But when I look at housing, I think about the saying with regard to the dehydrated man stuck in the middle of the Ocean.  "Water, Water everywhere without a drop to drink."  While I am interested in housing and there seems to be a lot of inventory, there really is nothing to buy.  How did I come to this conclusion?

I just did the math.  I pay $1700 for my two bedroom apartment.  I admit that it is a pretty good deal when you factor in where I live but I don't want to be spending way more than that right now.   Doing the math backward, I looked at houses with mortgage if I paid $2000 per month.  That comes out to a $300K mortgage.  Factor in a down payment, and you get a house of around $350K.

My search criteria was simple.  Find me a single family starter home in the $350K range located in Pasadena that has at least 3 bedrooms.  I think there was something like 3 listings.  All the close neighborhoods east are worse as they are even more expensive so there were no listings there.  West in the Burbank area?  Only a handful there too.

No way housing should still be this high.  All I want is a decent starter home and there is nothing within a halfway decent range.  So I'm staying out of the market looking for something to do with all this cash.

Make Money in Any Market

The market was down significantly today, almost 2%.  Despite this my portfolio was up about 1%.  Now you might think that is because I am short the market but that would not be the whole story.  I made money yesterday when the market was up by almost 2%.  Now I did not make as much money as the market but I also did not give anything back today.  One of the secrets that Warren Buffet always uses is to not lose money.  In a market like this one, it can be hard to do because of how it is whip-sawing back and forth.

I am achieving this through a very specific strategy.  I am pairs-trading.  This strategy is relatively simple.  You go long of one thing and short of another.  For example.  Say you are bullish on Broadcom.  You would like to buy it but it has had a pretty good run the last three months running up more than 50% in that time period.  To do a pairs trade you can buy Broadcom and go short of a broader index like the Nasdaq or the Semi-conductor index (SMH)  Why would you do this?  You are taking the market risk out of your stock purchase.  Stocks move up and down for any number of reasons.  Only half of a stock's price has anything to do with the actual company itself.  The other half is related to the broader market and the sector.  You are betting that the thing that you buy will outperform its peers but hedging yourself in case the market does crazy things.

I am short of the Dow, the real estate sector, and U.S. Treasuries while being long China, Materials, and a bunch of individual stocks.  This on a whole has performed quite well.  I've lost some money on my short positions since the market has continued to rally, but my long positions have more than carried me up.  Could I have made more money if I wasn't short?  Sure.  But the hedges have kept me sane by limiting my gains and more importantly limiting my losses.

I continue to use this strategy to great effect.  I think we are about to have another leg lower from here, there is weakness in the market right now and that is pretty evident.  I would like to get more short of the  market but won't get too crazy right now as I can easily be wrong.

Short Treasuries

I decided to put my money where my mouth and sell America.  I did this by buying TBT which shorts the twenty year US treasury.  I am not a fan of this market as I think the market should be going down and the rally we are in is very persistent.  I went into this trade because it works for two reasons.

• In the short term, if the market continues to rally, treasuries will do badly as people become less risk averse


• In the long term, the U.S. is taking too much debt and is going to find it hard to continue to sell treasuries

Not everyone will understand the first point so I will explain it a little further.  People buy U.S. treasury bonds as a defensive play.  That is, if you think the market is going down, you buy U.S. treasuries because there is little change the U.S. will default on its debt.  The reverse is true too.  As the market rallies, people look to take on more risk.  They sell bonds so they can buy stocks.

I think the correction in treasuries is going to come fast and it is going to come soon.  I now have a medium sized position in TBT and will look to get an even larger position in the next few weeks.

The Haves vs. The Have Nots

One thing that I have thought about over the past few weeks seems to be this bifurcation that seems to be taking place between those who are struggling in this economy and those that seem to be doing just fine.

In the news, I continuously here about how ordinary Americans are struggling.  Unemployment is nearing double digits in most parts of the country.  It is even worse around here as California is above 11%.  The U.S. is printing money to cover up the problems and big companies like GM and Chrysler are going under.  It seems all is doom and gloom depending on where you are looking at things.  Of course there are the "green shoots" that we all want to see.  This is the reason that the market rallied over the last ten or so weeks.  We are up over 30% from the lows because the market has decided that we are not going to reach armageddon.   But if you really read the news it does not look good for most of your average Americans.

But I get the feeling that we are really coming down to a society of the haves and the have nots.  Throughout all this bad news the one thing that has really struck me is how little some things have not been affected.  I went to the mall this weekend and it was pretty crowded.  Of course I have no idea if people are actually buying things.  Maybe they are just looking and needing to get to the malls to get away from their problems.  But I'm definitely not seeing the scracity of people I would expect to see.  It was the same thing this past holiday season where the malls and outlets were much more crowded than I would expect given the dire situation much of the nation faces.

For more proof just look at the movies.  Hollywood is having a fantastic year at the box office.  People are going to see the big blockbuster movies like Star Trek  and Terminator.  By many accounts, this might be a record year for Hollywood.  Now much of it is due to higher ticket prices but that in itself is a good sign.  It is not easy to raise prices if there is no demand for your product.  And clearly there is demand.   With ticket prices over $10 in most places, I would expect this to be a luxury most people skip as times get rougher, but that doesn't seem to be the case.

Now everything I've written is mostly anecdotal.  Maybe people are really cutting back and I'm just seeing it from a different perspective.  But it has me thinking.  Maybe this recession is hitting the population in very disproportionate ways.  Most people would immediately jump to a rich vs. poor conclusion but I'm not so sure.  If that were really the case, I wouldn't be noticing the activity I am seeing simply because the "poor" should greatly outnumber the "rich".

So what is it?  Are things really either that good or that bad? Who do you think is most being affected by this recession?

GM - Throwing Good Money after Bad

GM has borrowed another $4 billion from the U.S. government as it prepares for a possible bankruptcy filing.  It just amazes me the amount of money we keep throwing at this problem in the hopes that this will someday be a successful company.  In a world where we are throwing trillions of dollars around, $4 billion might not seem like very much money but this is actually a ridiculous sum.

To put this whole thing in context, keep in mind that this now brings the total that the U.S. government has given to GM to a staggering $20 billion.  Do you know how many global companies have a market capitalization over $20 billion?  Just take a guess.  The number is about 250 companies in the entire world.

$20 billion is about the size of a Costco and a Sony.  It is bigger than well known companies like Dell, Nike, News Corp, and Best Buy.  The U.S. government could have bought any of these companies with the stake that it lent to GM.  Now I know people will argue that GM allows people to keep their jobs and keeps communities open and blah blah blah.  But wouldn't it be smarter to invest this money in companies that actually have a chance of succeeding?  Wouldn't it be better to invest this money at retraining these people for jobs of the future rather than giving them false hope that we can somehow save the American auto industry?  Heck, it would be a better idea to give money to new and innovative companies like Tesla Motors than it would be to keep throwing money at a dying company like GM.

Just one more reason I am certain I never want government deciding where money and capital should flow to.

Time to Sell America?

Today, Bill Gross came out and said that America might lose its AAA rating.  For those who are not completely familiar with how bonds work, the AAA rating is the highest rating any entity can have.  It means that there is very little risk of default and thus enables the entity to borrow at low rates.

America has had its AAA rating for almost a century and it seems almost unthinkable that it could lose its AAA rating.  But just look at the facts.  The U.S. got into the mess it did because we as a nation borrowed too much money and spent on things we could not afford.  All the "growth" we have had for the last decade was a mirage.  We should have never reached the levels of economic activity that we did because we borrowed it from the future.

Now look how we are trying to get out of the problem. The U.S. is borrowing from the future to pay for the problems of today.  We have been doing this for the last two decades.  It is like a credit card junkie that pays off one credit card with another.  It just doesn't work in the long run.  The U.S. keeps taking on more and more debt hoping for a brighter future and an economy that will lift us out of this mess.  That day isn't coming.  To fund this, we are printing money.  It is working for now since other countries are buying our debt, but if we really lose our AAA rating, that will stop as the U.S. will no longer look to be an absolute safe haven.

So it is probably time to sell America.  I've been doing this slowly by selling treasuries, TBT.  I only have a small position right now but will look to take a bigger one soon.  You also want to own commodities and commodities stock.  When the dollar drops, "stuff", things that are actual and real, go up in price.   Things like gold, copper, and silver will all go up in price.

It doesn't feel good as an American to say sell America.  It feels like I'm playing against my own team.  But I just don't see how we can get ourselves out of this mess with our current path.  What do you think?  Am I just overly nervous?

California's Budget Problem

Yesterday, my fellow Californians defeated a series of ballot measures aimed at "fixing" the budget crisis that California now faces.  Sadly, this is the second budget crisis California has faced in the last several months.  Just a few months ago, our government proclaimed we had a $40 billion budget deficit and enacted a bunch of new measures to close the gap.  This included a 1% increase in the sales tax.  Something I wasn't too happy with.

But now California supposedly has another crisis on its hands and the only solution this time is going to be to make spending cuts.  What a novel idea.  Gee, we don't take in as much money as we used to, what should we do?  Seems pretty logical to me but I guess logic is not one of our goverment's defining characteristics.

I'm not saying budget cuts are easy.  I'm not saying that I want to see large class sizes and less police on the street.  But at the end of the day, you have to face reality.  I'm sure it was pretty painful for your average Joe to have to give their dream home they "worked" so hard for (notice the quotes since I don't think many American's worked all that hard for their house) but when the pink slip came and the money was no longer coming in, Joe had to give up the house.  Joe probably had to give up many other things to and I'm sure it hurt.

I've never found living within my means to be a hard thing, but that's probably because I never lived above my means.  I only wish our federal government had to be more like our state government.  I only wish they had to find a way to trim the fat rather than just print money.  I know some people may think that printing money sounds like a nice painless solution but believe me its not.  It just delays the problem until later.  It not only delays it, it actually grows it.   Money only has value if there is real value behind it.  Unfortunately for all of us savers, our dollars are starting to lose their vlaue.