2019 Idaho Real Estate Blog

Investor Speculation Main Boise Home Loans
The strong economic forces of supply and demand are taking a back seat to the speculative investor.


Dear reader:


Unless you count my ROTH IRA, my ROTH 401K, my wife's 401K, my one single family home rental that I rent to my brother (for only $650/month), and my piddly $6,940.83 Ameritrade account. I don't count my custom built primary residence as an investment, I count it as a home. ;-) Of the above "investment assets", I actively manage only the rental and the small trades I make in and out of stocks in my Ameritrade account in an effort to see if I can make money there (I started with $2000 a year ago!).

Emdeplam has been right for some time now...see the numerous previous blog replies he/she has posted. The speculative investor has played a major role in helping us to get in the trouble we are in. Obviously, there are other forces at play in addition to the speculative investor, but I challenge you to look at what has happened:

OIL FUTURES -- At the time I posted this blog, Light Sweet Crude for August deliveries was trading at over $146 per barrel. These prices have doubled in the past year, and it always seems as though prices go up when there is reason to THINK (speculate) supply will go down. A recent report said that more than 60% of futures contracts are now held by investors rather than refiners or gas producers...HMMMMMMM.

"Tensions remain between Iran and the U.S. and Israel over what the two allies say are Tehran's suspicious nuclear programs. Investors worry that any worsening of the standoff has the potential to disrupt shipments from OPEC's second-largest oil exporter. Also, a weakening of the dollar helped to support commodity prices Tuesday. Many investors view oil and other commodities as hedges against inflation and a weakening dollar, and their prices tend to rise as the currency declines." How much do supply and demand really matter when this is happening?

HOUSING PRICES -- Goes without being said. This bubble has already burst, but the housing market was over-inflated in large part due to speculative buying.

FANNIE MAE & FREDDIE MAC -- Chuck's statement in this July 12th blog it panic.  And Emdeplam's statement about how banks are skirting their 10% reserve requirement. Investors are selling Fannie and Freddie now, and asking questions later...thereby driving the stock price down. Wall Street fears that these companies will go under or require government bailout (already happening). Fannie and Freddie are critical to the recovery of the housing market because of the huge number (roughly 70%) of mortgages that pass through their hands...this adds up to over $5 trillion in mortgage assets.

Treasury Secretary Paulson is on record stating that the Fed's "primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission." Why come on and say such a thing on Friday the 11th? To squash speculation that the government will nationalize these two public companies. Senator Dodd has also stated that "these companies are strong and viable, and that the capital they have is good and in excess of what is required under Federal law." Are Fannie and Freddie adequately capitalized? Government officials say yes, but the speculative investor says no. As they say...only time will tell.

Emdeplam...are you still hedging FRM to be done by the weekend?

So, as the credible mortgage insights blogger, I diverge from my normal and educated line of thinking and blog topics to open up another discussion of which I am a self-admitted neophyte...what future role will the speculative investor play in helping or hurting our economic recovery? How will this help/hurt the national, and more importantly, our local housing market? Again...DISCLAIMER...I am not an active investor. I leave that to my fund mangers and financial adviser who know (I hope) what they are doing with my money.

BTW...I absolutely love reading on topics like this, so I had to jump into the fray. Emdeplam, you know I'm a fan, so I fully expect you to be the first reply...don't let me down.

Here's to another great round of corporate earnings...remember, we're in earnings report season now!

Warm Regards,

Eric Leigh, Mortgage Consultant
2965 E. Tarpon Drive, Ste. 150
Meridian, ID 83642
(208) 880-0316
Posted by Eric Leigh at 7/15/2008 11:59:00 AM
Comments (12)
Re:Investor Speculation
Great post-

First, on speculation- It makes markets liquid (buyers and sellers) and therefore creates price discovery. Whether its the Chinese, SWF, Hedgies or daytraders, without them you have inbalances in bid/ask that shut markets down (without speculators the housing market has become much less liquid...without consequences prices got out of hand---see 100% financing/sloppy stds)

Oil- If you want to know what the price premium speculators have on the oil market you need only look at the price on Futures expiration day. ANYONE who has a contract needs to either DELIVER OIL OR RECIEVE OIL ON THAT DAY. Speculators therefore get out (long or short) and you get market price for delievery. By the way, looking at the price difference on that day versus rest of trading it looks like speculators maybe +/- 2-5% of price in either direction. Blaming speculators by regulators shows a LACK of market knowledge. By the way speculators are more likely short than ban them and my money is that oil RISES. Bottom line is oil is traded in can't buy and hold...if you own it on expiration...guess what you either own it or sold it.

Housing prices- Mispricing of risk. The key was bond insurance (which could never be paid) that allowed bonds to be AAA. This made risk 'dissapear' since insurance premiums were less than selling price premiums for AAA--- wall street magic. This created a crazy demand, which made banks and lenders create crazy supply. IT WAS FRAUD...the insurance firms are insolvent...except for the fact the banks won't call them on the policies since they are insolvent if they call and then write down the loans without the junk insurance.

Freddie and Fannie- Still TBD. Likely the equity holders will get 0---that was my insolvency/bk call. Bond traders have bid the spread to Gov debt down...but not fully. Hank made things a little cloudy, but I see two outcomes...

US nationalizes them (whether they said that directly) bonds = treasury bonds and the Chinese, Russians etc are happy. The dollar will instantly crash, oil will shoot the moon along with commodities and the USA might lose AAA. It is just too big a balance sheet for even the US. YOu saw that the day before Hank came out as investors ran from gov debt with the meer thought it might be owned by the US.
Second option is the bond holders take a 5-10% haircut. Agency debt rates will will be looked at as risky (no US backstop) and mortgage rates will choke (as above as well). Huge owners of debt (china, russia, bond funds, your pension etc...) will be screwed. The dollar will strengthen and commodities should come down.

Okay there could be some hybrids in between, but they just tend to drag out uncertanty and pain and are worse in the end. This will likely happen so the 'playas' can find an exit while they try to stick retail (you and me) or the taxpayer (you and me) the bill.

One category you didnt mention (banks)
Speculators love them because they are LYING! They are hiding losses in LEVEL III accounting or SIV's. Until they come clean, they will continue to get pounded as the street smells blood. THE ONLY HOPE IS for the FED to force them to mark to market and properly account for everything. Don;t get me wrong , that would cause failures, but others would live. CONFIDENCE would return immediately and the market would settle.

Remember- speculators thrive on imperfect information, lies, BS accounting, CEOs who say they don't need capital and then raise it next week...
They also MAKE MARKETS and we would be a lot more inefficient without them...

The cure for the 'speculation problem' is HONEST ACCOUNTING / Transparency/ (and JAIL TIME FOR THE CROOKS!)...if everybody knows, if everybody sees the same #'s, there is much less room for speculation.

(btw, the Saudi's and others have made knowing how much oil is left very hard ==== speculators paradise.)

Oh, and Eric good gains on your account. My motto in these times is it is about return OF capital not on capital. Be safe...

If I get a chance I might comment more... beware the quick fix...we have mucho pain infront of us, but dragging it out like now is going to lead to a depression
Posted by on 7/15/2008 7:27 AM
Re:Investor Speculation
Oh, and just to be clear on oil.If you own a contract and are late delivering you pay about 1% a day. How many 'traders' want to arrange a cargo transport, and holding cell or a trucker to deal with the contract :-)- Ben and Hank's failure to deal with the lies in the system have destroyed the dollar and that is causing oil to rise...the 'speculator' thing is just a scapegoat.
Posted by on 7/15/2008 7:30 AM
Re:Investor Speculation
So I deleted the last post you made Emdeplam (just because it was so damn long, and not because it wasn't interesting). Thanks for connecting me to him and his writing...very interesting. If readers want to read some more of Karl's takes:

Still learning about oil, but am not sure I am with you on your take regarding oil speculators...

Tuesday's sell-off of oil futures contracts was, in part, due to a large number of expiring contracts...held by specualtors.?.? If a large number of these are held by speculators who never intend to take delivery, doesn't this create artificial demand that can crowd out actual end demand? Another report I saw (CNN) noted that one year ago, 20% of oil futures contracts were typically held by non-producers...that number is now over 60%? Sounds speculative.

Why is Morgan Stanley buying up wharehouse space in the store its hottest new property...oil?

Barclays Capital is chartering a fleet of ships and enter the shipping business? A non-user/producer of oil taking posession and trading oil...sounds speculative?.?.

Again, my disclaimer...I'm not an investor, and am dangerous at best. But so much seems to point at speculation and an artificial demand.

Posted by Eric Leigh on 7/15/2008 8:50 PM
Re:Investor Speculation

We got good evidence on the speculative premium this week. (Many Futures on oil -depends on exchange- close this week)

You saw prices pullback from $147 high to now $133. We had some significant macro growth slowing news- China and Europe both had ugly prints, so I would guess that $5-10 of the price at 147 was spec's. That was stronger than last FutX which I estimated at about $3-5.

The oil hoarding (ships/warehouses) is a real way to take delivery, but it is very very small compared to the total markt consumption and is costly in terms of holding fees. I am not saying it isn't happening...although the reports sound a bit 'tinfoilish' but I don't think it is a meaningful quantitiy. Do you know what day rates on oil tankers don't want to pay that floating oil at sea.

So all in all I would go with the 5-10$ spec premium. Again, Opex is the tell. When you hear of rolling contracts, SOMEONE still has to have the demand to buy and take delivery. Prices at Exp do represent real supply-demand balance... if you own an oil contract then you will be recieving a lot of oil at your door.

The 20%-60% rise is a good sign for market liquidity. It actually helps the market find a real price. Oil specultion is thus very different the stock or even home appreciation. If I am a flipper, I might be willing to buy a condo option and then hold it...make payments for a while etc... If you are an oil spec, the front month is the tell. You can't buy and MUST FIND A BUYER than needs your oil or you are in trouble.

Other thing to note is that corporations have become huge futures traders as price hedges. If you look at the speculation probably most of the 'but' specs' are hedging prices for big industry/business...the 'retail' and hedge funds are more biased on the short side of the trade. Good example is airlines. Southwest is doing much better than its rivals because it uses hedges to control it cost for fuel...
Posted by on 7/17/2008 5:24 AM
Re:Investor Speculation
All very interesting...still a neophyte investor, and learning is what I am good at! A friend of mine (and much more active investor than I) proposed a year or so ago that I purchase gold...not gold stocks, but gold. Of course I didn't and am now wondering what the hell I was thinking. At the time I was more concerned about where I would have put it! :-)

Regardless, I have since followed some of his recommendations with regards to my Ameritrade account and individual stock trades, and have done quite well. He maintains that there is one more large session drop in the market coming to watch for. Not a 1.5% drop, but a 3%-4% drop. When that happens, he says it is time to start buying and wearing the bull hat (sector specific of course). He likes technology (semi conductor), bio-tech, and health care a lot.

Your thoughts as I eye these speculative investments?

Posted by Eric Leigh on 7/17/2008 5:37 AM
Re:Investor Speculation
Depends on your time horizon. short/med/long
short term is driven on technicals, med on trend, long on fundementals
Now, short term 50 or 66% retrace likely-bullish next 2-3 weeks likely, md term secular bear market we are headed lower, long term fundemental are horrible

The most basic advice I can give LT investors s watch the 50week and 200 week averages on a broad index (like S&P). When the 50 drops 1% below the 200 get out, when it rises 1% get in. If you follow this you will avoid 70% of the bear market and get 60% of the bull...from history back to 1950's. You don't hear it much because you can do it at home and don't need a fancy fund manager. Take a look on a chart. BTW sell signal hit Jan-Feb this year. (You only get this signal once every 2-5 years so it won't be a lot of in and out)

I don't play volitile and too leveraged. Gold looks like it is in and ABC should have a pull back soon and then head higher. I just don't understand the market well enough to put my money in it. Ultimately gold id a geo-political hedge (not necissarily inflation)...look at a history of prices versus major world conflict. You can play GLD the ETF and trade it like a stock with 0 leverage. Just expect violent is a commodity.

As I said we are in a bear market. My target for mid year was 1220 which we hit. I expect a retrace (all S&P figs) to 1270 or even 1320 before we begin the next leg down. Ultimately my next inter. target would be around 1050 and I expect to see 3 handles on the S&P at some point during the bear (maybe 1-2 years out).

Remember bear markets are wicked. They kill bulls and bears because they are very unpredictable and drop and spike to pull in both sides.

Biotech is a decent sector. I again don't do much with it, since there is a lot of insider crap with those stocks. They rise for 2 reasons...breakthrough drugs and buyouts. Both of those reason usually have lots of insider knowledge. Having said that the big pharma stocks have little pipleine and I believe (if they have cash) will be forced to buy some of the biotechs in the near future. It is also considered a safer bear market sector. Technology I would avoid...especially big tech. They have survived on the weak $ and overseas growth, but Europe is starting to close on there own recession and Asia has slowed as well. I expect the NASDAQ to get killed... but of course there will be winners.

Why don't you play financials, mortgage companies or home builders. I would think you have some great working knowledge. These sectors are of course the dogs of the exchange, but whoever survives will be a great investment. All the homebuilders can't go BK for instance. A good way to play this is like a hedge fund...long SDS- 2x the inverse of the commercal RE index (33% of the $) and put 66% of the dollars in a RE name that will out perform. You will then gain the relative difference... (okay that might be a bit of a tough one if you are a newer investor)

Anyway, be very careful in the market now. We rallied yesterday and you saw all the heavy short sectors shoot the moon. Banks flew as shorts covered...homebuilders rallied (lots of shorts there too). Don't be a hero either. EVERYONE wants to buy the bottom (see all Chinese and Kuwait SWF's who lost a lot on our banks)...don't fight the trend. We are in a secular bear market, so if you want to hold something long(buy) you need to be an active trader. How many times did people think Citibank hit the bottom? 35...30...25...20...15...?

If you are going to be in, therefore you need to learn to trade..that's technicals. Get yourself a book on technicals. You make your money when you buy. Chose an entry that has a quick exit when you are wrong. ALWAYS play with a stop...that cuts your loss off.

Easy way is to play the trend...don't be a bottom caller...trend is long term down so be suspicious of any rallies.

Oh, never invest in something you don't know what it is. Lots more people than you think own lots of toxic MBS right now. Never listen to the TV people too seriously..they are always late. I knew we had a rally comming soon because EVERYONE ON TV was talking about the end of the world.

Oh, and use history. go look at the 2001-2003 bear market. Look at stocks...look at all the head fake rallies on the S&P. Lots of suckers buying Tech, etc on the 'pullback'.

Good luck
Posted by on 7/17/2008 6:46 AM
Re:Investor Speculation
Oh, watch this guy
He is pretty basic...does a youtube of the market daily. He is a great introduction to trading. Very fundamental trader...very open minded. As a free resource ...excellent...he doesn't hype and knows he is talking to novices so you won't hear wild buy sell calls.
If you watch him you will learn the basics of technical trading, momentum, trends, etc... but read a good book too...
Posted by on 7/17/2008 6:52 AM
Re:Investor Speculation
I'm definitely in for the book. Love a great read. Recommendations?
Posted by Eric Leigh on 7/17/2008 7:02 AM
Re:Investor Speculation
Market Wizards, by Jack D. Schwager
New Market Wizards, by Jack D. Schwager
Way of the Turtle, by Curtis Faith
Trading in the Zone Mark Douglas
How I Make a Living Trading Stocks By Tony Oz -practical
Posted by on 7/17/2008 7:10 AM
Re:Investor Speculation
Read "Fooled by Randomness" and "The Black Swan" both by Nassim Taleb.
They will help you to never think you have a sure thing and always be careful of comments, data and statistics
Posted by on 7/17/2008 7:11 AM
Re:Investor Speculation
And just so you know...I'm watching financials closely. It's not quite comfortable yet, but there are a large number of banks who are VERY WELL positioned and more than adequately capitalized. This market has crushed this sector, a bit too much in my opinion.

As they always say...time will tell.

Until next time!

Posted by Eric Leigh on 7/17/2008 7:39 AM
Re:Investor Speculation
Good recent report on th financials from Dick Bove

Lists banks with capital/non-performing assets
Beware- I like his stats, but his commentary is off IMHO...he made a financial 'generational buy' call that was WAY off!

Also watch banks Level III assets. That's the BS level where huge losses can be hidden my accounting. - edit, watch all bank accounting right now...they started taking gains on the fact their bonds are worth less (haha...income from being a credit risk)...they have also forward book income from neg AM pay $800 they book $2000
Posted by on 7/17/2008 9:04 AM
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