Once-Hot Markets Hammer Traders
These are tough times for the speculators that people love to hate.
Everybody knows who they are: The Wall Street sharpies, the hedge funds, the house flippers and others who live and work for the fast buck, and whose concept of long-term doesn’t extend beyond a few calendar pages, if that.
Amaranth Advisors last week became the biggest hedge fund to blow up since Long-Term Capital Management in 1998, after wrong-way bets on natural gas prices cost the firm billions of dollars.
What was bad for Amaranth -- a plunge in gas prices to two-year lows -- is, of course, welcome news for people who would like to keep their home thermostat above 60 degrees this winter.
Speculators in the oil market also have finally gotten a comeuppance, after riding prices to record highs in the summer. Oil futures have plunged 21% since peaking at $77.03 a barrel in mid-July.
With the price at $60.55 on Friday, chatter about $100 oil has died down considerably. That is consoling to consumers, if not to the fraternity of short-term futures traders who have been accused of driving oil to levels that far exceed what fundamental supply and demand would dictate.
But speculation isn’t a game reserved for commodity players. It also has been a popular strategy in the residential real estate market, where some Americans who would never invest a dime in an oil futures contract have been risking far more than that by flipping single-family homes and condos in the last few years.
Now, the flippers are facing falling housing prices in many markets. The old game plan -- say, buy in January, sell in June -- doesn’t look so brilliant anymore.
In formerly red-hot San Diego County, the median price of homes sold in August was down 2.2% from a year earlier, to $482,000, according to DataQuick Information Systems.
Paradise on the Pacific has company in the red-ink department: Measured from the first quarter to the second quarter, home prices fell in 67 of 317 U.S. metropolitan areas, according to an analysis of federal data by Global Insight and National City Corp.
The government’s official index of national home price changes still was up 1.2% in the second quarter from the first quarter, but that was the slowest rate of appreciation since the fourth period of 1999, the Office of Federal Housing Enterprise Oversight says.
No patriotic American would root for an end to the housing boom -- unless that patriot happens to be a renter who has been hopelessly priced out of the buyers’ club.
For them, there won’t be much pity for house flippers who have helped inflate the price bubble in many markets.
HomeSmartReports.com, a San Juan Capistrano company that tracks housing data, last week published a report on second-quarter home flipping activity in 147 metropolitan areas.
The firm considers a house flipped if it is sold within nine months of being purchased. Tracking those transactions, HomeSmartReports.com found that 17.1% of all homes flipped in the second quarter were money losers for the sellers, up from 15.4% in the first quarter and 12.2% in the fourth quarter of last year.
Flippers who lost money in the quarter lost a median of $38,975, said Michael Ela, head of HomeSmartReports.com.
Even so, if 17.1% of flippers lost money, 82.9% either made money or broke even -- far better odds than Vegas. For those flippers who made a profit in the second quarter, the median gain was $42,500, Ela said.
But if housing appreciation continues to slow, the flipping game obviously will get tougher. And as speculators try to bail out of once-hot home markets, they’re making it that much harder on one another -- and better for people who have been hoping for a price break.
Westwood-based KB Home Corp. on Thursday partly blamed “investors” (a group that includes speculators and anyone else buying a home to resell rather than to live in) for what it described as the “considerably” weakened state of housing markets in California, Nevada, Arizona and Florida.
“These and other markets have experienced a rapid change in investor activity from buying to selling homes” in recent months, the firm said in a preliminary report on its sales for the quarter that ended Aug. 31.
If bullish price speculation is no longer working in energy or housing, it has continued to be a highly profitable strategy in the Treasury bond market.
It was a speculative bet in late June to buy a 10-year Treasury note that paid an annualized yield of 5.24%. Even though that was the highest yield in four years, the conventional wisdom was that the Federal Reserve wasn’t finished raising short-term rates.
But the Fed went on hold at its August meeting and stayed on hold at its meeting last week as well. Many on Wall Street now figure that the Fed is done tightening credit and that its next move will be a rate cut in 2007.
The bond market has bought into that view in spades, egged on by some downbeat data in recent weeks that suggest the economy is decelerating faster than expected.
The 10-year T-note yield ended Friday at 4.59%, a drop of 0.65 percentage point from the June high.
Bond prices rise as yields drop, so buyers of bonds in June are sitting on a tidy capital gain. The share price of the Vanguard Long-Term Treasury bond mutual fund has jumped from $10.56 on June 28 to $11.24 on Friday, a 6.4% rise. For boring old bonds, that’s a lot of money to make in just three months.
That’s the kind of speculation that the housing market, at least, can feel good about. Falling Treasury yields are pulling mortgage rates down as well. The average 30-year mortgage rate fell to 6.40% last week, down from 6.80% in late July.
But in the stock market, investors -- and bullish speculators (as opposed to bearish ones) -- have to be hoping that bond buyers are overly pessimistic about the economic outlook.
The Dow Jones industrial average last week was closing in on its all-time high of 11,722.98, set in January 2000, before jitters about the economy knocked it back. If the economy stalls out, the implications for corporate earnings, and thus for stock prices, could be dire. The Dow ended the week at 11,508.10.
If bond yields stay down in the next few months, and if stock prices falter, the irony may be that both trends will play into the hands of speculators such as hedge funds.
Here’s why: At current levels, relatively safe investments such as Treasury bonds don’t pay enough for long-term investors, particularly pension funds, to meet their obligations. They will have to look for bigger returns elsewhere, which is what hedge funds pledge to do (although pledging and delivering are two different things).
And if stock prices fade, it could reinforce the idea that the equity market can’t sustain a rally. Recall that the Dow also was flirting with its record high in May, before a sharp sell-off took the market down through mid-June.
If stocks can’t keep going, more frustrated long-term investors may shift to the hedge-fund mind-set of blitzkrieg trading: Buy the Dow at 10,700, sell at 11,600, make 8% and wait for 10,700 again.
Tough times for speculators? Don’t cry for them just yet.
