David Lentz

Options Trader: Tough-Decisions Tuesday

Phil and Cover -- you misunderstand me -- I do not think that ANYONE would willingly sign up for a hundred-year mortgage. But rather that the still-outstanding ARMs (which are going to continue to implode like clockwork as their rates ratchet up), be forcibly converted to fixed-rate loans, with the rates at reasonable levels so that they can maintain the payments, but that they would suffer for their foolishness, and their lenders not bear all the punishment, by having the terms of those mortgages extended until the total interest collected would be the same as it would have been under their current ARMs.

I repeat, this would only apply to existing ARMs. New mortgage seekers would be free to choose any kind of mortgage they could obtain (except ARMs, which should be barred from use by homeowners). The intent here is to stop the implosion of the existing ARMs, and stop the build-up of the housing overhang. That's all.

And this would do so, far more cheaply than any other scheme. And at this point, it appears that cheap is a major consideration, Uncle Sam having blown the family nest-egg at the local saloon.

Options Trader: Tough-Decisions Tuesday

There is an even cheaper way to stop the madness.

Simply require that all holders of ARMs convert them to fixed-rate mortgages, at the going rates that the GSEs offer.

To prevent the lenders from getting a haircut, and taking all the pain, merely extend the terms of the new mortgages such that the lenders will ultimately receive all the interest that they would have if the ARMs had continued, or some reasonable fraction of that money.

The net impact of this is that the borrowers that are in over their heads get effectively converted to renters, with mortgages of over a hundred years on houses whose value is below the amount on the mortgage.

So they can't sell the homes until housing market valuations recover, but they are also not forced out of their homes, dumping the repo'd properties onto a scrap heap that is crushing the industry.

In the end, these folks are probably toast anyhow, but at least it does not happen in just a year or three, but instead is spread out over decades, with unlucky individuals facing up to their problems as they are either forced to move or suffer economic calamities (lose their jobs, divorce, etc) that place them in the position of having to deal with their under-water mortgage.

This would immediately stop the inventory build-up in unsold housing, would allow millions of homeowners to remain in their homes (albeit saddled with a debt burden they will, in all likelihood, spend the rest of their lives paying off), and allow things to stabilize in the ravaged housing industry.

Then we can have a measure of sanity (not too much, as that wouldn't be normal) in the financial industry, and begin to lay the groundwork for a recovery. The powers that be would have the time necessary to implement a sane regulatory framework -- instead of some emergency claptrap that will be riddled with a whole new set of problems, which is where we are heading now.

It's really easy to bring all this to a responsible conclusion. Instead our collective head is on fire, and we are attempting to put it out with a hammer.

Apple: Leading the Way to a Total Tech Breakdown

People, people, people -- please remember that equity markets are part fundamentals and part emotional response. Prices are driven mostly by one or the other of these factors only at the extremes.

Anyone claiming looking at the state of the global economy and expecting ANY company that makes its money selling to the public to do well over the next 6 months to a year is looking into another universe.

We can rationally expect to see PE compression as an ongoing fact of life, so that if AAPL's earning rise by 20% and the PE compresses by about a third, it will still decline in price.

It really doesn't take a rocket surgeon to see this. What it means is that APPL will be a better buy later than it is today, which is exactly what Zach has said. You can either ride out a downturn and wait for better days (which I think everyone will agree are eventually coming), or sell now and buy back in at a lower price point.

Different strokes for different folks.

Only those buying now and expecting to reap profits over the next quarter or two are going to be disappointed -- I think there's a saying, something about fools and their money, that might apply here.

Why It's Going to Be a Long Recession

"... Kinda makes the war in Iraq seem cheap, doesn't it ..."

Nope. Not even a little bit. Even the grand gesture to bail out the Chinese, Japanese, and PIMCO is small compared to the amount we are burning in Iraq in order to ... ?

Oh yes, keep the terrorists over there.

But what about the terrorists in Washington?

GSEs Into Conservatorship: Can Housing Stabilize Now?

"What a stupid comment. Government backed is risk-free."

Tell that to the folks in Zimbabwe.

According to the pie chart on the tax forms, in 2006 we paid 6% of our national outlay merely to pay interest on the debt. Since then, the debt has expanded a LOT, and this will boost it still more.

How long until Uncle Sam has trouble making the payments on the interest?

Yes, he can always kick the monetary printing presses into high gear, but to reiterate my initial point, just ask the folks in Zimbabwe how well that has worked out.

When we have a national interest expenditure in the 15% and up range, it will be VERY DIFFICULT to get the debt under control (as if it wasn't difficult before!).

Thursday Outlook: Commodities, Emerging Markets

I like the notion of adding Canada as well -- it's a lot closer to most of use culturally and economically than a lot of the other foreign ETFs. Of course, maybe that makes the S&P or Russell indices close enough to not need it. I dunno.

Chile, Facing Challenges, Sees Stocks Stall in the Second Quarter

In addition to being a large fertilizer producer, SQM is also the world's largest supplier of lithium, making SQM (and indirectly ECH) an interesting play as 2010 approaches, with the promise of plug-in electric hybrid vehicles utilizing lithium-based batteries (there are a number of assumptions required to get here, but they seem pretty sound) with amounts of lithium FAR in excess of that used in the typical notebook computer or camera battery.

While fertilizer sales are headed lower -- temporarily, people still need to eat, and the last time I checked, they were still making people at a ridiculous rate -- this is a temporary situation that is probably best treated as an opportunity to accumulate more SQM. Hopefully, the managers of ECH will be loading up on SQM at depressed levels.

Food never goes out of favor for long, and it takes fertilizer to make food.

disclosure: yes (isn't it obvious?), I own SQM.

Options Trader: Wednesday Outlook

OK, so why can't you construct options plays (straddles, strangles, and the like) between options on ETFs of commodities, stock and/or currency indices, and capture the shift that way?

Pretty much everything is monetized in the form of ETFs today, and in many cases, there are options on those ETFs.

Or did I completely miss the point here?

Real Interest Rates Are Actually High

Let's see if I understand you here. If real interest rates actually are "high", then the Fed should be able to drop them, even into negative territory on a nominal basis, without sparking any significant inflation -- if the nominal rates really are high, that is.

Do you really believe that? It doesn't pass the smell test for me.

But I will allow that perhaps things are sufficiently damaged that the Fed should be driving rates into the subzero realm, flooding the markets with ever-more-copious amounts of shiny new debt to replace that which has gone up in smoke.

But "perhaps" does not mean "certainly". I think that something more than algebraic smoke and mirrors is required to demonstrate the reasonableness of this theory that rates are in actuality, high at the current 2% level.

The way I was raised, rates are "high" when they exceed the rate of inflation sufficiently as to dampen inflationary expectations. And that simply ain't the case.

The Solar Market: Horseshoes, Hand Grenandes and Demand Predictions

In assessing the demand for solar, you might want to try and factor in the expected price of oil in 2010. Here too , one finds guesstimates all over the map, from low-end estimates well under $100/bbl to numbers double that and climbing.

That just goes to show you the uncertainties in projecting energy market prices. It's the same pretty much everywhere. Uncertainties abound.

So what does that mean? Lots of volatility. A trader's market, rather than an investor's -- or that investor's have got to have deep pockets, and a high tolerance for risk, as there will be no reliable guesstimates that they can hang their hats on.

Investing in energy is as much a matter of faith as finance.

Is the Bull Run in Commodities Over?

"A fundamental truth of commodities is that they fluctuate about a mean. If demand exceeds supply, ultimately a new mine opens and supply then exceeds demand."

But what about the demand side of the equation? Sure, it's a bit depressed at the moment, but if you look at the global population growth <upload.wikimedia.org/w...;, you can see nothing but increasing demand ratcheting commodity prices ever-higher.

The "mean" that commodity prices fluctuate about is being pulled upward by rocketing population growth. The green revolution and development of antibiotics has created a situation where demand is soaring, at rates far beyond our capabilities to increase supplies to match.

On Being Rich

"Poor" is when you spend every waking moment working to try and make ends meet, with nothing left over as discretionary income.

"Middle Class" is when you have some choices about what do do with your discretionary income, but still must work for a living.

"Rich" is when you have the option to live entirely off your assets, without being required to work to earn money. The "rich" may still opt to work, but it's because they enjoy what they do, no because they need the income.

Rich/Poor/Middle Class have nothing to do with income levels. It's all about discretionary income relative to your spending.

Options Trader: Tuesday Outlook

On a less silly note, it just seems to me that the nature of bear markets (and unless anyone is going to step out and proclaim the housing crisis to be ove, the debt calamity resolved, and nothing but clear sailing ahead, we are still in a bear market) is to whipsaw the victims into capitulation (and we have not yet arrived at capitulation by any of the typical measure -- declines from the peak, VIX, ...).

So expecting whipsaw activity in the markets, the last thing I expect to see is a straight-line movement to commodities implosion. I instead expect to see a series of movements back & forth between inflation and deflation, soaring prices and commodity collapse, increasing in frequency and intensity, until the investment community finally cries "uncle".

Options Trader: Tuesday Outlook

Ummmm... guys, over at Bloomberg they have an interview with T. Boone Pickens predicting that oil will return to record levels by the end of 2008 ...

All this backslapping and happytalk kinda reminds me of the ever-popular plots of such theatrical greats as Friday the 13th, Friday the 13th 2, Friday the 13th 3, ... where you know that after the monster has been killed, it will still make one more surprise visit before the end of the film.

Of course, that's just a movie, and this is real life, no similarities at all there, no sirree, nothing to be cautious about, the root causes of the problems have all been dealt with, so we have nothing to be concerned about. Go long!

The Election's Impact on the Market

Sorry to pick the one item out of a broad range of items that happened to stab me in the eye. It's one of my personal hot buttons that nobody seems to understand this issue.