I think XHB is more likely to go down than up. However, I had so much capital tied up in puts that I wanted to redeploy into financials and retailers. I had a lot of puts that were $20 or more in the money. The risk/reward ratio was getting less favorable, especially for WCI and SPF. For example, if I wait 3 months for WCI to go down 10%, that is only a 50 cent gain, which is only a 5% return on my capital when my $30 puts are $25 ITM. I also don't like the premiums and trading costs of rolling these puts into puts with lower strike prices.
So far, this has been a good call. For the last 5 days, XLF has fallen 2% more than XHB. I think XLF has a lot more potential than XHB as a short. I think the homies are an open book. Wall Street should have been able to put a reasonable price on its current troubles. The financials have very opaque balance sheets, and I don;t think WS has discounted them enough. Retailers are still showing profits, but I think the Christmas season is going to be a disaster.
Long SCC, SKF, and SRS. However, SRS is more of a play on REITS than homies.
It has been a wonderful ride.
about playing the obvious moves with homebuilders. I recommended a few weeks ago that 17.75-18 was a very solid entry point for a bounce..and I emphasize bounce! Today (Thurs..12-6) XHB is riding a relief rally to 19.80-19.90. I strongly urge those of you who ventured a few hundred shares at the lower price to consider selling very close to (if not at) this point.
Once a rate cut comes the relief is difficult to sustain..unless you think it will be a half point!
Homebuilders just have too many knots to untie before profitable building even looks likely..let alone probable. And people have very little money to pump into existing homes so Home Depot..Lowes..etc are going to have a rough Winter-Spring 2008.....
I think this will be one of those "feel good rallies" that will reverse itself next week. The idea that this sector is suddenly out of the woods is completely misguided. The relief proposed is so narrow in application as to almost be meaningless except from a psychological standpoint. Given the stringent lending standards in place and huge inventory overhang, we are talking a liquidation mode at this time. Going forward on any new construction projects will be very risky for any builder absent a demand for the end product. So, it is very difficult to see how these builders will be able to survive except by cutting staff and scaling back. It is will be a long time before the HBs can ever produce the kind of numbers they did in the hayday. Both units sold and margins will be altered severely to the downside. At best, they will be marginally profitable for several years to come and it will eventually be seen in their prices which are still at least double what they should be using the most optimistic forward looking view.
As for lenders, they will also be suffering and trying desperately to hang on. The fantasy that somehow the government had something to do with this purported relief is a joke. The lenders were forced into this position by circumstances. Buried somewhere in this cabal is some form of taxpayer bailout or some form of special change in the bankruptcy law that will shield the lenders from their creditors.
The financial markets are in a unified Long Term Capital Management situation. At risk is the total collapse of the financial markets. I don't think this gimmick will work and we could very well skip past a recession and go right into a depression with massive bank failures. The ice is very thin here.
I'm still hanging on to puts. As much as the government is trying to put an optimistic spin on things, it is a market still in deterioration. It is just damn difficult to get a loan today to buy a house given all the fall out in the lenders. And where is the demand for housing with prices falling every month? And what about the poor slobs who bought homes only to see auctions follow at 60% of what they paid. And how do you think the lenders feel about that put the loans on the other homes? And now appraisers are getting conservative (finally) and using foreclosures sales in the zip code as comps.
The homebuilders and related stocks are a long, long way from any recovery regardless of what dead rabbits Paulson and Bernanke try to pull out of the hat. There has to be more blood spilled and some companies are going to have to belly up.
I was quite wrong on my decision to close out my homie shorts in early November. XHB is down over 11% since then. I left a lot of profits on the table. I still have SRS, but that is only up 7% since then. I am very disappointed about that relatively small gains in SRS, but I guess REITS are doing better than HBs.
I have also suggested that XLF would fall more than XHB. I was way off on this -- XLF is only down 4% vs. 11% for XHB. However, the individual financials that I am short have fallen much faster than XHB. Look at WM, FED, FNM, FRE, BKUNA, DSL, which are my biggest short positions. Too bad DSL recouped a bit lately on some BS fund manipulation.
Retail has also held up better than I expected. I would have done better short XHB than RTH.
Good luck and congrats to those who stayed short XHB.
final capitulation. Of course, right after the enlightenment came the buying opportunity! Please Wangeroo..and I mean this more sincerely than you can imagine..tell us when you think it woiuld once again be smart to buy XHB!
I'll be keeping my all in short money at the ready.....