Imho the probability is 100% we go to point #1 from here.
Then 0% probability from point #1 to point #3. It was not always that trivial. A system running into debt deflation can lead to 100% downpayment on a house, which was NOT zero probability going into 2008. (Thus the price of the house is 30% will be whatever it was at the peak!)
There shouldn't be a rush, either. 20-30% downpayment will most likely cause the likeliest future events to be from point #1 to point #2.
Conclusion: Details suggest pricing and lending may lead house prices (they basically front run house price declines and increase pricing in anticipation of more declines). Nibbling on calls and long FRE for speculation purposes that FRE beats, due to 1. later by a month reporting close date capturing lots of MBS improvement and 2. generally leading FNM in credit loss by 1 quarter so I reasonably expect the amount thrown into the pile maybe smaller than the most dire predictions.
Otherwise the american idol, beerswilling, ownership USA society would miss this particular headline.
Then again u could still be off 10% from here and be broke and not participating in the majestic waterfall ride:
By Michael Tsang and Nick Baker
May 5 (Bloomberg) -- The biggest rally in the Standard &
Poor's 500 Index in more than four years is luring investors to
equities from cash, just as options traders are betting the
advance will evaporate.
The benchmark index for American shares rose 4.8 percent in
April, the steepest jump since December 2003, and through last
week had climbed 11 percent from a 19-month low in March. The
rebound came as Federal Reserve Chairman Ben S. Bernanke
arranged the bailout of Bear Stearns Cos., took subprime-tainted
mortgages as collateral from investment banks and cut borrowing
costs to a three-year low.
Jean-Marie Eveillard, who runs the $22 billion First Eagle
Global Fund, is skeptical the gains can last because the worst
housing slump since the Great Depression will reduce earnings.
S&P 500 companies are valued at 22.7 times profit, the most in
four years. Options traders are paying 63 percent more to
protect against a drop in the S&P 500 than to bet on a gain, the
widest difference since at least 2005.
``It may be a suckers' rally,'' said Eveillard, who is
based in New York. ``Investors want to believe. But if I'm
right, then there's truth to the argument that this is the worst
financial crisis since the end of World War II. The same kind of
reflex is the wrong reflex.''
The S&P 500 gained 1.2 percent to 1,413.90 last week,
adding to the rally that helped the measure avert a bear-market
collapse of 20 percent. The benchmark index plunged 18.6 percent
from its record 1,565.15 on Oct. 9 to its low on March 10.
Cash to Equities
Today, the S&P 500 declined 0.5 percent to 1,407.16 as of
11:21 a.m. in New York trading.
As the advance took hold last month, investors shifted more
than $100 billion out of cash held in money market funds, whose
assets had swelled to a record $3.54 trillion, according to data
compiled by Washington-based Investment Company Institute.
The climb hasn't dispelled concern among traders of U.S.
options. Implied volatility, the measure that calculates
expected price swings of an underlying asset and is used as a
barometer of options prices, shows that many investors are
betting the U.S. stock market will falter.
The implied volatility on options that lock in gains if the
S&P 500 drops at least 10 percent in three months reached 24.67
on April 30, Bloomberg data show. That compared with 15.1 for
options that pay out if the index rises at least 10 percent.
The 63 percent difference indicates the highest demand for
options insurance since at least 2005, according to data
compiled by Bloomberg. A decline of 10 percent from the S&P
500's closing price last week would take the measure down to
1,272.51, below its March 10 low of 1,273.37.
Sucker Protection
``There are pockets in the marketplace that believe this is
a sucker rally, and they're willing to pay a substantial premium
for downside protection,'' said Robert Arnott, whose Pasadena,
California-based Research Affiliates LLC oversees $26 billion.
He said in December 2006 that a bear market was probable.
Nouriel Roubini, professor of economics and international
business at New York University's Stern School of Business, says
the Fed's seven rate cuts since September -- which lowered the
benchmark lending rate to 2 percent from 5.25 percent -- aren't
enough to stave off a contraction and that earnings expectations
are unrealistic.
Investors are currently paying the highest prices relative
to earnings since March 2004 and 15 percent more than when the
S&P 500 reached its all-time high in October.
The U.S. economy expanded 0.6 percent from October through
March for the slowest six months since the 2001 recession.
Meanwhile, consumer spending rose at a 1 percent annual pace
last quarter, also the weakest since 2001.
Profit Rebound
Still, analysts estimate profits at S&P 500 companies will
rise 12.1 percent and 51.7 percent in the final two quarters of
2008, respectively. For the first quarter, 363 companies in the
S&P 500 have reported results, posting an average decline of
13.3 percent. That compares with analysts' projection at the
start of the year for a 4.7 percent gain in the quarter.
``You're going to have further losses for the financial
system and weakening of demand of employment, of earnings, of
profitability that's going to push further down the stock
market,'' said Roubini, who more than a year ago predicted a
housing slump would drag the U.S. into a recession. ``This is a
temporary, bear-market rally.''
ISI Group Inc.'s Jeffrey de Graaf, the top-ranked technical
market analyst in Institutional Investor magazine's survey the
last three years, says the decline in trading last month also
shows investors aren't confident the gains will last. De Graaf
is based in New York.
Trading Slows
An average of 1.31 billion shares changed hands each day on
the New York Stock Exchange, the least since September 2004 and
the slowest for the month of April in six years.
Quincy Krosby, chief investment strategist at the Hartford
in Hartford, Connecticut, which manages $360 billion, is more
sanguine. She says the worst may be over for the economy and the
financial markets saddled with $319 billion of bank losses.
Financial stocks in the S&P 500 have gained 11 percent
since the end of March, the biggest increase among the 10
industries in the index. Meanwhile, gains in railroads, trucking
companies and airlines signal the broader economy is growing and
bolster the case that the stock gains are justified, Krosby
said.
`Past the Downturn'
``It's a validation of investor belief the U.S. economy
will pick up in the next six to seven months,'' she said. ``It's
a sign the market is looking ahead past the downturn. Slowly but
surely, the Fed rate cuts will be working their way into the
economy.''
Gerard Minack, chief market strategist at Morgan Stanley's
unit in Australia, says that's a mistake. The global economy
will probably worsen, Fed rate cuts will be less effective than
in previous periods and profit growth will disappoint, he wrote
in a note today.
``We are in the midst of a bear market rally,'' Sydney-
based Minack said.
NYU's Roubini also expects additional pain.
There is ``complacency among investors thinking that the
worst is behind us for credit markets and for financial markets
and for the real economy,'' the New York-based Roubini said.
``This is not the year to be in risky assets like equities.''
--With reporting by Eric Martin and Elizabeth Stanton in New
York and Adam Haigh in London. Editors: Chris Nagi, Daniel
Hauck.
Find other names in the space. I already have DHR (and added DCI more recently) for some weeks. There will be similar news out of JNJ soon, but I predict P&G is fully priced in if you let me use that much-misused term. But you know what I mean.
I think there is a reasonable chance the right "neutral" trade is to pair these with something like COF - local "financier" with only US exposure and no collateral behind the loan, and dependent upon securitization. Have you heard anything so far from "uncollateralized lending" folks other than "we got massive subordination, etc etc"? Right. So who owns the "massive" subordination or in fact is that not what you call earnings? :D
My thinking is more on picking the timing on the short side for the pair trade. Could COF make it to $60-65? That's forward 12x P/E+.
I am intrigued at what point, WITHIN ONE QUARTER from May 1, 2008, does the 20 WMA crosses over the 50 WMA, and thus reversing the SELL signal into LT-BUY signal ?
There are basically several scenarios - SEE CHART BELOW - that I consider, and (please don't ask too much details for now), probability of those as implied by SPY Aug option prices. There are things that don't exactly fit any of the description but I "managed" to lump them in one category or the other (and don't ask me how, either).
I also showed:
The Good news: Within the next 3 months, it is UNLIKELY that the LT-SELL signal will change into a LT- BUY signal
The Bad news: It would, for the most part, be like chinese water torture, watching paint dry, and unprofitable expedition for inexperienced Bears.
Look at what happened to BEARS in HIGH probability EVENTS:
Not only do you NOT make money, the signal will also be getting close to cross into LT-Buy.
You are trading $$$! Not trading Signals.
You (BEARS) could be right about the signals.
BUT - 75% of the time, as my estimate indicated, you WONT make much money or even lose.
(That's basically the same as 75% of the time the Bulls are wrong about anticipating the signal to turn into LT-BUY, but they wont lose anything or even make a bit of money!!!!)
