Friday, October 23, 2009

Market Neutral with a Vengeance:

Since the start of this rally in March I have only taken 55% of the 60% gain of the S and P. I have prudently forgone the last gasps of this uptrend and I am happily backing away from the table with my gains. I have gone market neutral in my retirement account. This means that my 50 stock positions are hedged equally against generic short positions in the market. I have accumulated quite a bit of cash so if the market goes up some more I could be tempted to go "net short" in a few sectors, such as finance and real estate. In my "house equity account" I have taken some of my cash and I am tactically shorting individual stocks. Presently all stocks appear to be rising evenly. In my opinion the rise in some sectors is premature. One solid example would be hotels which have rising vacancy rates. I have shorted Mariott and Starwood hotels and will sell quickly if I can get a little profit. I will dollar cost average down if the hotel sector rises more. I also have a short on oil. I just sold my short on long term treasuries but that is not to say that I believe that yields will go down in the future. I am just picking some low hanging fruit in this dysfunctional market. Trading on volatility seems to be the only prudent way to invest now that the stock market is above fair value and the government and The Herd are dead set on creating another bubble and thereafter another economic downturn.

Lafayette Housing Market:

The Lafayette housing market has started to trend down from the high in late 2008. Like most high end markets Lafayette peaked much later than lower end markets such as Pittsburg and Antioch. Where Pittsburg and Antioch are pretty close to reaching a bottom, Lafayette is still a few years away. Adding to the problem of a late start is the raw stubbornness of high end markets. Presently Lafayette has a median listing price of $1.4 million and a median pending sale price of $820,000. This is why the Days on Market numbers are going through the roof, from around 10 days for sales during the bubble to 80 days presently. The median final sales figures for October and November should easily finish under $800,000. People trying to sell at $1.4 million and finally selling 80 days later at $800,000. It is frustrating to watch a home that comes on the market at $300,000 over market price stay on the market for 9 months and sell for $1 million under list. In this kind of market a house has to be priced perfectly. I have watched hundreds of homes in the Sacramento market that were priced just a little over market value in 2006 ride the wave for years and sell hundreds of thousands of dollars less. A very bad tactical move but that is just the downward stubborness of the housing market. Unlike the stock market that can move down like a greased roller coaster.

Lower End Housing Markets:

There are some incredible things going on in the Antioch and Pittsburg housing markets. The less expensive fixer uppers are selling like hotcakes. Many of them are being fixed and sold again for a profit in a just a few months. This is a very interesting game, but it does make me question the market participant's motives. If this is just another rendition of musical chairs for home speculators, what is going to happen when we go into the 2011 economic slowdown? The good news is that most of the purchases by investors are for cash, so the government will not have to bail them out after this round.

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