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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Housing: Homeowner Vacancy Rates Vs. Starts

    I'm holding unrealized capital losses on a speculative position in Louisiana Pacific (NYSE:LPX), a maker of wood products for the construction industry. I think the company is well-run, a strong player in a difficult cyclical industry.

    So the question comes up: when if ever will US housing recover? Here's a chart from FRED:

    (click to enlarge)

    Just kind of eyeballing it, the average vacancy rate appears to be about 1.5%, and the average total starts about 1,500 thousand.

    The thinking would be, that until the vacancy rate gets down to 1.5%, starts will continue to lag. I was holding some homebuilders when the financial crisis hit, and have always taken an interest in the sector, since low P/E's are common. Looking at the skyrocketing vacancy rate, I closed the homebuilder positions and went on to other, more promising investments.

    Of course the housing bubble relied on big banks as bad actors, issuing mortgages that had no prospect of being repaid, and passing the risk on to the GSE's and private mortgage and bond insurers. They made numerous fraudulent statements and misrepresentations in order to perpetrate the scam, and have since been punished, perhaps not as much as they deserved, but it's pretty much over.

    If you ask them what's wrong with the housing market, they will tell you the rules are too strict, and threaten to take their ball and go home.

    The simple fact is, that excess inventory was created, and it will have to be absorbed before the housing starts will recover. And the recovery will not be to previous highs, since they were unsustainable. It's very unlikely that new government backed sinks for low quality mortgages will be created anytime soon.

    The trends since 2010 are pretty clear, and they're going in the right direction. I'm investing on the basis that improvement will continue until what should be an equilibrium point will be reached in 2017.

    Homebuilder (NYSEARCA:XHB) stocks tend to have seasonal patterns, with optimism reigning in the spring and reality ruling later in the year. My take: now would not be a good time to take losses on LPX. Very possibly the position will show a profit sometime next year.

    Similarly, Homebuilders are worth watching, but entry points should be chosen carefully. If I get involved, most likely it will be Toll Brothers (NYSE:TOL), because they cater to the high end.

    Disclosure: The author is long LPX.

    Tags: LPX, XHB, TOL, Housing
    Sep 21 9:46 AM | Link | 4 Comments
  • Rolling My LEAPS Out To 2016

    I prefer to keep the expiration dates on my long options positions dated as far into the future as possible. The thinking is, that if the market tanks, the greater time to expiration will cause them to have a greater increase in time value, setting up the opportunity to roll down and harvest the volatility.

    With that in mind I started work on Jan 2015 expirations, looking to roll out to Jan 2016. Putting the trades in as calendar spreads, the bid/ask is fairly wide. However, as a rule of thumb under current conditions, I look to pay 1% of the strike as a debit to roll the position. I think of it as 1% interest on the notional loan of the strike price.

    Most of what I rolled was priced around my 1% rule of thumb, with a few higher. Even trading in very small quantities it seemed as if the market-makers were willing to go along. In a few cases I rolled up at the same time, so the spreads were diagonals. I managed to get prices that I thought were fair.

    This is a small detail, but during the financial crisis I found that the longer dated LEAPS behaved better as the market plunged to its final bottom. So for 1% to 2% why wouldn't I do it?

    Aug 25 4:05 PM | Link | Comment!
  • Looking At Nonfarm Employment After Jackson Hole

    This morning I located and read the text of Janet Yellen's speech delivered at Jackson Hole. What I saw was a very careful discussion of complexity, resulting in the conclusion that the Fed will not be relying on a single variable of any type in assessing the level of employment and the resulting indications for monetary policy.

    She also mentioned, which got my attention, that we only recently passed the previous peak of nonfarm employment.

    Monetary policy is a driver of economic activity as well as asset valuations. We don't know the exact relationships: in point of fact, there is considerable animated debate on the topic. As a way of getting away from the fuzzy thinking and forming an opinion for my own use in directing my participation in the market of stocks, I looked at nonfarm payrolls, using FRED, the graphing facility at the St. Louis Fed. Here's the chart:

    (click to enlarge)

    Because of shifting demographics and structural changes in the workforce, it's not that useful to use the information going back 50 or 60 years. So the analysis is, how long was it from the time that nonfarm employment exceeded the previous peak until the downturn heralding the crash of 2008/2009?

    It was 3.0 years, from 01/01/05 to 01/01/08. Now nonfarm payrolls most recently matched the previous peak on 05/01/14. If you add three years, we could look for the cycle to turn down in the Spring of 2017, with the market following in due course.

    My take: barring an exogenous event, employment will grow at a rate between 1.5% and 2%, carrying the economy along at a comparable pace, for the previously developed 3 years. Add some inflation and there will be nominal growth around 4%.

    The Fed, relying on fuzzy thinking, will remove accommodation at a deliberate pace, and will subsequently tighten less rapidly than during previous expansions.

    Prudential regulation will slow the onset of wretched excess in US financial markets, but will not prevent it.

    My reaction to this potential scenario is, to leave my Vanguard index funds fully invested, and to focus my attention on extracting market-like returns from my discretionary portfolio. Using options for risk management, I'm taking exposure to high quality dividend payers by means of LEAPS, selling covered calls for income, and holding substantial cash, as a cushion on personal spending, and to be deployed in the event of a decline in the market.

    Disclosure: The author is long SPY.

    Additional disclosure: As a retail investor, I don't give investment advice. I blog to expose my investment thinking and process to critical examination and comment from readers, as a way of accessing the collective wisdom of market participants.

    Tags: SPY, DIA, QQQ, Macro
    Aug 25 7:31 AM | Link | 6 Comments
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