ARCHIVED COMMENTARY
Construction Man
Sees No Bust Yet
For edition of September 19, 2006
If the stock market is about to get short-squeezed to new record highs, a possibility I raised here the other day, what would be the catalyst? A plausible answer can be glimpsed in the very interesting letter that I received recently from a Rick’s Picks subscriber, a man in the construction business who says things don’t look too bad from where he’s sitting, at least not right now they don’t. The subscriber’s long-term outlook is very bearish but he is nonetheless willing to accept that the U.S. economy is not quite ready to go down the toilet.
For balance, and lest we be lulled off guard by his pragmatic point of view, I have included at bottom a report on foreclosures in California from Merrill Lynch that could make one’s scalp tingle. With ARMs just starting to ratchet up by 2% or more, the housing bust continues to evolve beyond the nostrums of monetary policymakers.
A Bullion Buyer
The subscriber writes as follows:
“I have been reading all of the doom and gloom forecasts for the U.S. economy and believe, like many others, that they will prove to be correct. To prepare for hard times, I have been positioning myself over the last six months for the long haul, buying physical gold and silver bullion. I will probably buy more soon.
“On the other hand, I see the realities of what is going on in my own business. Our bid activity is still high, sales are steady and we will at least equal our volume over the next 12 months. Our year ends on September 30, and we will have done approximately $14 million in gross sales. We currently have an $8 million backlog. These are projects that will get built. In our trade, it is typically four to seven months from sale to delivery of materials to the job-site. There is still just so much money out there that I think forecasts of doom are premature.
Headlines Deceive
“Having been around construction all my life and worked in the business since 1981, I have been through hard times before. During the early 1990s I saw my income cut by 50 percent in one year. I do not think we are at that point yet. There are declines in business sectors and in areas of the country that are making headlines. But aren't we seeing the same thing in the markets? Certain sectors are doing well others are falling, but there is no broad decline yet.
“Again, I believe that the day of reckoning is coming, but there is just too much noise about it right now. Maybe after everyone is breathing a sigh of relief about the ‘soft landing’ we are experiencing, and about how ‘Helicopter Ben’ has saved the day – maybe then all hell will break loose. I don't know about timing, but I do know that when I can't take jobs unless I do so at a loss (i.e., buying work to keep the lights on), the end is near. We are not there yet. Maybe March or April of next year? Just a guess.
“I do want to be on the winning side of the trade when that happens, and I am getting my education now in your chat room. So far, a few early losses because I’ve been too aggressive. I have to keep reminding myself that cash is a position too.”
California Foreclosures Soar
And now for that chaser from Merrill Lynch, followed by a brief commentary from our friend Jas Jain:
“In California, foreclosures are up an astounding 160%. The culprit, according to RealtyTrac, is the resets on option ARMS – apparently coming in at a typical two percentage points above the rate on the initial mortgage. That’s a bit of a problem for an economy whose median wage rate is rising by a whole lot less than the growth rate of the debt-servicing obligation.
“About 25% of all mortgages carry adjustable rates, and more than half of those loans are to sub prime borrowers (according to data gleaned from USA Today). As a result, 12.2% of ARMs borrowers were late in making their mortgage payment in 2Q – the highest since 2003, when the economy was shedding jobs and the Fed was freaking out over the deflation threat. In 18 states, more than 15% of homeowners with sub-prime ARMs were behind in making their payments in the second quarter. And it’s not just in frothy areas – the Midwest may already be borderline recession as the auto sector cuts hit home because the delinquency rate in Ohio is 11% for homeowners with sub-prime ARMs.”
Here’s Jas’ take:
And this is with home prices down barely 5% from their highs! One genius assured us recently that even a 25 percent drop in home prices wouldn’t harm the U.S. economy. What is this guy smoking? The 160% rise in foreclosures in CA is from a low levels, but it could go to 400% if prices drop another 10-15% in less than six months.”
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What Do I Need to Know?
Registration forms for the October 28-29 Hidden Pivot seminar at the Fairmont Waterfront in Vancouver went out yesterday to those who earlier had said they plan to attend. Click here to receive the form if you were not on the list. If you are wavering, here is some possibly useful information that was elicited by the following query:
“I received the email with the registration form this weekend. I am seriously considering attending the weekend in San Fran and would like to ask a few questions which should help me make my decision easier.
“I have studied technical analysis and traded for a short while using various parameters to determine which stocks to trade and when. I have also studied options trading and traded options for a short while. My account was never funded at a high enough level to really do this full time and I then found an opportunity to work in the giant online gaming industry.
“That brings us back to this:
“What level of knowledge should I possess to be able to understand and learn the things you will be teaching? “
There are no prerequisites. The method I teach is unlike any other, and the concepts are more visual than mathematical. It is fundamentally simple, since price action is the only variable considered.
“Do you provide enough information and training that I can come back home and immediately begin applying the concepts and techniques in my direct access account?”
Yes, you will come home from the seminar with enough knowledge to try some easy trades. However, before students put more than mere pocket change on the line, I strongly urge them to solidify their learning, and to build their confidence, by visiting the free chat room that has been set up mainly for their benefit.
Just four months after the seminar, some of my grads are nearly as good as I am at identifying Hidden Pivot swing points. My goal is nothing less than to make every student as proficient at forecasting as top pros who do it for a living. With just a couple of months of free mentoring, I can promise you that you will never need to ask some “expert” what he thinks about this stock or that, or about “the market”.
“Will I need other subscriptions and paid access to various other services to put this knowledge to use? (I will gladly subscribe to your newsletter bulletin, but some programs require other subscriptions after they have collected the seminar fees with no mention of this before the conference. I do not mind additional monthly charges but they should make sense and not be there for the primary sake of creating an ongoing revenue stream without any real benefit to the subscriber!)”
Though not required, a Rick’s Picks subscription will give you access to the chat room; it should prove sufficiently useful to pay for itself. I encourage you to subscribe and warrant that you will find it well worth the price.
“What is the recommended minimum amount to have in my direct access account to trade using your Hidden Pivot method?”
Trading relatively cheap options in lots of four, $5,000 should be more than enough. I currently keep about $25,000 in my direct access account, since this allows me to hedge trades with stock, and to sell puts and calls naked-short. However, most of the trades I recommend, and most of the ones that I do myself, are relatively simple and involve buying stock, puts or calls, not naked-shorting.
“Are there any books that you recommend reading before attending the seminar?”
The 110-page classroom manual you will receive is complete in itself and adequate for self-teaching. For a good option primer, try Options Demystified by my friend Tom McCafferty.
“Anything else you would like to mention about the material covered during the weekend?”
You will not find an easier forecasting system that works as well as this one.
“Sorry for the long email – I am very serious about making a decision to fly down to San Fran so your thoughts are greatly appreciated.”
No trouble at all. I hope the information I’ve provided is helpful to you.