Keep Your Eyes on Real Estate

Market Action:
Friday morning’s jobs’ report was pretty much as expected with just under 100K jobs created while the January’s number was revised up by 35K.  The unemployment rate did drop 0.1% to 4.5%, which of course doesn’t mean too much given what it is measuring.

Importantly, the stock market decided to move up on the news opening up a small window of opportunity for selling the opening.  As for trading, the NDX opened with nearly a 1% pop followed by a move that took it back down to even in under an hour.  There was another attempt to sell it off during the afternoon that looked pretty promising on the downside but led to a strong close instead.  As for the Dow, it jumped 65 points at the opening and followed a similar pattern to the NDX.  

Real Estate:
This weekend, real estate seemed to be attracting our attention as we read through several articles.  For those of you who have access to the online version of the New York Times (all it takes is to register and you can read the article), there is an article by Gretchen Morgenson entitled “Crisis Looms in Market for Mortgages”.  

Here are a few highlights from the article:  The first paragraph starts like this, “On March 1, a Wall Street analyst at Bear Stearns wrote an upbeat report on a company that specializes in making mortgages to cash-poor homebuyers.  The company, New Century Financial, had already disclosed that a growing number of borrowers were defaulting, and its stock, at around $15, had lost half its value in three weeks.”

That report probably was responsible for the little increase in price on NEW on March 1st, the stock moved up above 16.  NEW is mentioned in our March 5th post saying that the stock dropped 70% that day to 4.56 and now by the end of the week it closed at 3.21.  The NY Times articles says that the Bear Strearns’ report indicated a downside risk of about $10.  

The article quotes Thomas A. Lawler, founder of Lawler Economic and Housing Consultant as saying “I think there is no doubt that home sales are going to be weaker than most anybody who was forecasting the market just two months ago thought.  For those areas where the housing market was already not too great, where inventories were at historically high levels and it finally looked like things were stabilizing, this is going to be unpleasant.”  Oh really, unpleasant, you say.

There are some interesting facts in the article about “liar loans”, those loans that people were able to make a statement on their income and no one would actually check it against real documentation.  Apparently, in April of 2006, that’s almost a year ago, a report by the Mortgage Asset Research Institute “analyzed 100 loans in which the borrowers merely stated their incomes, and then looked at documents those borrowers had filed with the IRS.  The resulting differences were significant:  in 90 percent of loans, borrowers overstated their incomes by 5 percent or more.  But in almost 60 percent of cases, borrowers inflated their incomes by more than half.”  

Opinion/Analysis:
As we looked at the market on Friday morning, we thought it might have been a good opportunity to get on board some puts.  Back on March 1 we mentioned the possible retracement levels in the Dow and the lowest one we thought would occur was 12,340.  Well, Friday’s early morning push had the Dow up to 12,330 before it rolled over.  

We have mentioned previously that the first move up should be attended by a pretty strong up move because there should still be some major bullishness.  And, there sure seems to be a lot of bullishness around, at least in the media.  We’re not so sure that it is deep enough for buying to occur.

The volume of the past few sessions, you know the ones that have come After the fall, has been noticeably weaker than during the drop.  This has given us even more fuel for the bearish case.  We expect that selling could come into the market at any time.  As we have tried to say in the past, surprises will be to the downside.

One other interesting item on Friday morning was the deep sell off in the bond market.  On what looked like inflationary pressures had eased somewhat, the bond market didn’t like the news for some reason.  We want to keep an eye on these developments.  

Our Moves:
Anyway, we felt at least somewhat confident about buying some puts on Friday morning.  We would have liked to see a bit more strength (giving us cheaper puts) but we set up a few trades in the morning.  As the day wore on, we didn’t like the action but we did stick with our puts.  We put on about half of what we wanted to put on so hopefully we will be in a position to make another trade this upcoming week.  The one trade we put on was the QQQQ’s June 44 put.  We got in at 1.71 in the morning right off the bat and the bid was 1.88 at the close even though it had traded up to 2.07 by mid-afternoon.  Work sometimes gets in the way or we may have taken those 35 cents.  

Upcoming News Events for the Week:
January business inventories—Tuesday
February Producer Price Index (PPI)—Thursday
March Philly Fed Report—Thursday
February Consumer Price Index (CPI)—Friday
  

Dow Industrials:  12,276.32  +15.62
VIX: 14.09
HUI:  328.24
QQQQ:  42.93
QQQRR:  1.88 bid (purchased on Friday at 1.71)
RYVNX:   17.63
RYAIX:  21.93
RYCWX:  36.85
TLT:  89.40
BEGBX:  13.78