Fin

Time to Get Serious About Utilizing Short ETFs

Great idea. Why didn't you implement this in August when SKF was well below 100 as opposed to today when it closed at 140 ? The news was all out there and except for a brief period in October when it appeared that liquidity might return to the secondary (non gse's) markets SKF did nothing but rise.

Why Countrywide Is Cutting Ad Spending

Heh Prince, great article, it read really well. The only problem is that virtually nothing in the article was true.

First your article states that lenders have cut back on advertising because they are currently experiencing unprecidented refinancing demand, and they do not have the capacity to handle that demand.

Second you attribute the current demand and refiance boom to the stimulus package which will raise loan limits for GSE's.

Third you state that CFC is fighting for its survival and that their online advertising has to go.

Well Prince, hate to burst your bubble, or get you a clue, but please be advised of the following:

First, the current mini-refiance boom you refer to was last month's news. Interest rates dropped sharply during the first three weeks of January, and then rose sharply since January 23rd. Mortgage rates on conforming loans (GSE's) have risen about 75 basis points since that time. Jumbo mortgages have risen even more since the market liquidity of these securities is still significantly impaired. As a result of significantly higher interest rates the current refinancing demand has all but dried up. For this reason alone, lenders including CFC have appropirately cut back on advertising costs.

Second your article stated that the sudden demand for refinancing is mainly due to the stimulus package which raised the loan limits for conforming loans (GSE's). Nice one Prince, but unfortunately, beyond ridiculous, even for you! The mini-refiance boom was during the first three weeks of January, and the stimulus package had not been signed by the President at that time! Furthermore the higher loan limits have yet to be implemented to date. In fact it is very unclear exactly how and when these loan limits will be implemented.

Third, your article implied that CFC and other lenders do not have sufficient capacity to handle the current boom. There is a current bust (see above) and these lenders have more relative capacity now (capacity relative to mortgage demand) than ever before. They are literally frothing at the mouth for these loans and will jump at the chance to advertise whenever market conditions are favorable. Your assetion that CFC is not advertising because BofA is prohibiting it, is once again, totally ridiculous. CFC is looking to maximize their employee (sales staff) retention, and mortgage volume even if profitability temporarily suffers. Furthermore this type of advertising is very cost effective when market conditions are right. BofA will no doubt insist that CFC change their business model (i.e take away local execution and perhaps their wholesale channel) but to imply that a mundane operational item such as advertising falls into this cateogary is...well Prince...ya did it again buddy !!!

Anyway Prince, another great article, keep up the good work. Entertainment value.....priceless !

House-Price Momentum: The Good News

The increase in housing inventory and foreclosures has already brought prices lower and this trend is expected to continue for quite some time (perhaps 18 months or more). Additionally interest rates are expected to increase during this time period. In terms of the emotions of greed, fear, and humiliation, most people would rather sell and either downsize or rent rather than go through the humiliation of foreclosure. I think it will take quite some time before inventory starts moving agian and it will be at substantially lower prices versus today.

Playing the Bust, Understanding the Boom

Like the author I have been playing the short/long strategy on the financial index since late August when the syndrome began, using Proshares SKF and UYG as the ETF tools. The syndrome consisted of strong downward bias with occassional offsetting upward spikes, prior to and immediately after positive announcements for the financials, such as Fed fund cuts, Bank of America announcing their intention to purchase Countrywide etc.

The simple strategy was to keep SKF most of the time, but to immediately sell SKF, and simultaneously buy UYG in anticipation of, or less desirably, in reaction to, positive news in the market discussed above.

Exteme examples of this included the Tuesday morning following Martin Luther King day, immediatley after the Fed made their unscheduled announcement to cut rates 75 bais points, prior to the market opening. Implementation of a premarket SKF/UYG switch immediatly after this announcement and well before the market opening produced the single largest 24 hour gain utilizing this strategy. Another big day occured when BofA announced their intention to purchase Countrywide. While this announcement was impossible to predict, it coincidentally occurred on the same day as a scheduled Fed announcement to cut rates, so if you followed the strategy, you would have enjoyed a very nice day with UYG.


Questions ?

Are the financials close to a "local minimum" or temporary state of equilibrium ? I think so and therefore the fun may temporarily be over. Spikes are decreasing in amplitude and we may be headed towards a slack tide here. Notwithstanding if this is true, then there likely will be a strong buying bias in the not too distant future. If so one can play the same game in reverse i.e. keep UYG most of the time and simultanesouly switch to SKF if/as bad news occurs.

The basis for the syndrome and stategy was: People act emotionally and believe what they hear in the media. More specifically people quicly panicked in mid August when the press went absolutely insane bashing Countrywide to sell news (most of which was either false or misleading). This caused investors to panick losing untold billions in the market. The news and panic quickly spread throughout virtually all mortgage lenders, banks, brokerage houses, insurance companies, real estate companies, and the real estate market in general (virtually every company listed in the financial index) thus creating the syndrome and the strategy.

Thoughts ?

Are we at or very close to a temporary state of equilibrium for the financials ?

Was this a legitimate arbitrage likely to repeat or simply a very lucky speculative set of investments ?

If this was an arbitrage, will it be much more difficult playing in reverse when value based financial buying begins i.e is the emotion of investor greed (effective for the reverse strategy) much less powerful versus the emotion of investor panic which was the basis for the current strategy discussed above ?