It's been a fabulous year-so good in fact that
until we got stopped out of General Growth Properties (GGP) this past
week…
WE HAD AN EIGHT PLAY WINNING STREAK GOING WITH
AN AVERAGE PROFIT OF OVER SIXTY-PERCENT PER TRADE AND TWO OF THOSE
GENERATING WELL OVER ONE-HUNDRED PERCENT PROFITS!
And these winners didn't take months to generate
their big gains either-the average play was only open eight short days!
I've never heard of ANY kind of service (and I subscribe to just above
every one of them out there) that offers those kinds of returns in that
short a period of time.
Heck, even our one losing play last week turned
right around and plunged toward our profit exit this past Friday just
like we thought it would-we just got stopped out with an errant tick
higher before that could happen--but the point is our ultimate analysis
on the stock was correct.
Now we're looking at a whole New Year's worth of
trading opportunities and it promises to be a very good one for us. As
much as I love booming markets and robust economies we always seem to do
better in bear markets-and there are some powerful reasons to believe
the bear could be large upon us in 2008.
I'm going to be traveling this next week and won't
have the opportunity to watch the open Monday morning, plus last week's
super-thin holiday trading demonstrated the wisdom of waiting on the
sidelines until normal volume returns. For that reason we won't have any
specific new picks this week-but I do have some suggestions for the New
Year on how you can make this your most profitable year in-spite of what
the economy may be doing.
The key is to play the market at hand and get good
at the downside as well as the upside.
Make no mistake-the US economy is facing some
powerful headwinds going in '08. We've seen volatility jump through the
roof since September and by the looks of things that trend is likely to
continue-and that can be a very good thing for us option buyers.
Here are a five of the major 'Bad Boys' that could
really bat the markets around this year:
MARKET BULLY NUMBER ONE: THE HOUSING CRUNCH
CONTINUES…
Existing home sales have plunged 31% from their 2005
peak. New home sales are down even more - around 48%. Meanwhile, single
family housing construction activity has tanked 55%. And the decline
isn't over--the issuance of new building permits - an indicator of
future housing starts - has dropped to its lowest level since 1991.
The outlook
has worsened as empty homes keep stacking up:
An index that measures home builder
optimism, buyer traffic, and expected sales has plunged from the 70s
during the boom to 19, a record low. And the nationwide home vacancy
rate has surged to a near-record 2.7%, a testament to the dramatic glut
of empty, depreciating homes sitting on the market.
Homeowners
are defaulting like crazy:
An alarming 5.6% of the nation's homeowners have fallen
behind on their mortgage payments - up from roughly 4.7% a year earlier
and the most since 1986. The percentage of homes in any stage of
foreclosure has jumped to 1.7%, the highest since the Mortgage Bankers
Association began tracking it in 1972.
According to some
estimates, as many as 2.2
million homeowners
could lose their homes over the next 24 months!
We've already seen the price of an American home lose
6.1% from a year ago, according to research group S&P/Case-Shiller. The
Census Bureau shows the price of new homes down even more - 13% in
October, the sharpest drop in 37 years.
This coming year home values will likely fall by the
mid-single digits nationwide, and more in select markets.
Longer-term, the downturn in construction activity
will eventually cut housing inventory to a more manageable level, while
lower prices will entice more buyers to step up to the plate.
But it'll take a good long while to get housing supply
and housing demand into better alignment. Don't expect the overall
market to start a gradual recovery until late 2008 at the earliest--more
than likely, it will take until 2009.
MARKET BULLY NUMBER TWO: THE LAST BASTIAN
OF STRENGTH IN THE REAL PROPERTY SECTOR-COMMERCIAL REAL ESTATE-IS
STARTING TO CRUMBLE…
Third-quarter delinquency rates on commercial real
estate loans surged to a nine-year high of 1.94%, up from 1.11% a year
earlier, and they're poised to rise even higher in 2008.
The result: Commercial property values will likely
deteriorate in 2008, and commercial foreclosures will escalate. Heck,
the process is already underway - as the Wall Street Journal
reported on Wednesday:
"For the past few months, the commercial real estate
sector has been in a state of near-paralysis, as financing has nearly
dried up. The number of major properties sold is down by half, and many
worry that the market will continue to deteriorate as property sales
remain slow, prices continue to drop and deals keep falling apart."
Earnings prospects for a wide variety of Real Estate
Investment Trusts, or REITs, will likely weaken as well, prompting even
more REIT investors to jump overboard.
After all, office, industrial, and retail vacancies
are starting to rise, and rental growth is never going to live up to the
extremely optimistic projections promoted during the boom.
MARKET BULLY NUMBER THREE: THE
DEVASTATION OF THE FINANCIAL SECTOR
The financial industry is by far the biggest sector of
the SP-500 generating hundreds of billions of dollars in profit over the
past few years. Originating, bundling, buying, selling, and trading
residential mortgages, corporate debt, leveraged buyout loans and more
was a gigantic cash cow.
This unprecedented boom created an explosion in the
packaging and trading of complex, hard-to-value derivatives.
Take about a bubble--the face value of global
over-the-counter derivatives soared to a stunning $516.4
TRILLION in the first half of 2007! That was up 40% in a year
and up almost six-fold since 2000, according to the Bank for
International Settlements.
Unfortunately for many financial firms, that business
model is now shot. Complex debt securities are blowing up left and
right-and it's not limited to just the US markets. The risk of parties
to derivatives transactions actually failing to meet their obligations -
known as "counterparty risk" - is rising fast. And the origination and
packaging of all kinds of debt is grinding to a halt.
A couple key examples...
Commercial real estate bond issuance plunged to $4.9
billion in October from a peak of $26.9 billion in August.
Sales of asset-backed bonds, like those comprised of
home equity, auto, and credit card loans, plummeted to $29.1 billion in
November from a peak of $140 billion in March.
Bottom line: The decline in all these businesses will
crimp sector earnings. Loss rates on previously originated loans are
also poised to rise sharply. That makes most financial stocks a
high-risk bet.
MARKET BULLY NUMBER FOUR: ELECTION YEAR
POLITICS WILL SPAWN A HAILSTORM OF WILD-EYED BAIL-OUT SCHEMES
The 2008 election kicking into high gear ramping up
into one of the most pivotal presidential election years in decades -
not only because no incumbent is running but also because
the biggest days of the
campaign are likely to coincide with some of the worst shocks of the
housing bust.
There is no greater issue for politicians than the
prospect of millions of voters losing their homes. It's the American
Dream turned into the American Nightmare and by gosh they're going to do
something about it.
Result: Unprecedented pressure on Washington officials
and politicians - whether coming, going or staying - to keep voters
happy and the government bailout machine in overdrive.
Already the White House has announced an "FHASecure"
reform plan designed to make it easier for troubled borrowers to
refinance with a government-backed mortgage.
In December, we also got the much-heralded "Paulson Plan" - a separate
program to freeze interest rates for certain borrowers.
Democratic politicians are pushing even more aggressive plans. Hillary
Clinton, for example, wants to institute a 90-day moratorium on
foreclosures. Connecticut Senator Chris Dodd, who is also Chairman of
the Senate Banking Committee, recently spearheaded an effort to go
further down the path of FHA reform.
Meanwhile, on the monetary policy front, the Fed is
jumping into the game with both feet. Late in 2007, it cut the federal
funds rate ... slashed the discount rate ... and made other sweeping
changes to the way it channels funds to the banking system. You can
expect policymakers to continue competing for bailout supremacy on the
monetary policy and legislative fronts. We could even see additional tax
bills targeted at stressed consumers and borrowers.
While these efforts will help some marginal borrowers
and banks, they won't be enough to offset the economic forces aligned
against residential and commercial real estate.
MARKET BULLY NUMBER FIVE: DESPITE AN
UNPRECENTED INFLATION OF THE MONEY SUPPLY THE US ECONOMY IS STILL
CAREENING TOWARD RECESSION
When an iceberg pierced the hull of the Titanic nearly
a century ago, nothing could keep the 46,000-ton ship afloat. Likewise,
once the credit crunch began piercing the U.S. economy in 2007, there
was nothing on the foreseeable horizon that could prevent a recession.
Never forget that lenders provide the lifeblood of an
economic expansion.
Companies borrow money to build factories. Developers
take out loans to put up apartment complexes and strip malls. Consumers
use credit cards and home equity loans to finance their spending. But
now, that flow of credit is being squeezed everywhere.
It's also getting tougher and tougher for businesses
to obtain commercial and industrial loans. In fact, half the lenders
recently polled by the Fed say they're tightening standards on
commercial real estate loans.
That's double the level a year ago, and the
highest reading since 1990, when the Savings & Loan crisis was crippling
the banking system.
With the "housing ATM" spitting out fewer and fewer
dollars .. and standards tightening across a wide range of loan products
... the economy is starting to roll over.
Consequently, it looks like 2007 could end up being
the auto industry's worst sales year since 1998, and despite the hype
the just-completed holiday shopping season was a real disappointment.
It's clear that the federal government and the Federal
Reserve will do everything they can to fight the recession threat--but
they will likely fail, with the economy shrinking for at least part of
2008.
BUT EVEN ALL
THIS ALARMING NEWS WON'T STOP THE DIE-HARD PERMA-BULLS FROM TRYING TO
"CATCH THE BOTTOM"
We've already seen
it dozens of times in '07 and the pattern will likely repeat itself with
even more volatility in 2008. Every time the markets really sell off
driving the VIX toward the top of its range traders will rush in to 'buy
the bottom' sparking a short covering rally that resembles the speed and
trajectory of a rocket launch.
All you have to do
is take a look at the past four months chart on any major index to see
the pattern. We'll likely need seatbelts and helmets for the market ride
going forward but thank your lucky stars you're an options
trader-because the opportunities on BOTH sides of the market have never
been greater.
This is one roller
coaster ride that can make you a fortune-with the right plays, on the
right stocks, entered at the right time. Which is why I've never been
more excited to have you on board-you can make 2008 your best year ever
with strategically placed money makers going both ways.
Looking forward
we've really got something to celebrate-so here's wishing you a fabulous
New Year filled with health, happiness and GREAT prosperity!
Keep up the good
work,
Peter
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