2008? Again!? (HD)

2008? Again!? (HD)

The question remains – are we just witnessing some commodity and equity market volatility, or is this the real thing – genuine economic adversity, complete with massive job losses and a plunging stock market?


Everyone has his take, to be sure, and we’ve seen some heavyweight investor types calling to batten down the hatches and weigh all anchors. But we don’t see it that way.


In the first place, the high yield bond market is in trouble, yes. And high yield is also a very important and sensitive indicator of economic health. Moreover, spreads have widened considerably off Treasuries, and that’s certainly a sign of stress. The question is where is that stress centered, and what, if any, are the implications that arise therefrom?

Smoke in background

The majority of the distressed debt today is found in the resource sector, most formidably oil and gas, where soft prices and massive rig closures have affected every company in the game. Debt service has become a problem for all but the deepest pockets in the sector.


In contrast to that, back in 2008 junk spreads were far wider, and the damage was not relegated to just a single sector. Bad lending habits at that time forced companies from across the spectrum to retrench and forego payments on their junk issuance.


Sentiment Sour


Point Number Two – we discussed this in weeks past, and we’ll reiterate here briefly– nobody believes. The AAII sentiment survey has posted the least number of bulls in over a decade. We repeat: current levels of optimism are lower than they were at the bottom of the 2008/09 bear market! Any contrarian who sees figures like these is bound to pop a bobbin. That ain’t bearish.


And finally, we want to look at the real estate sector – the place where all our troubles (in 2008) began. And we ask – are banks and other lenders as willing to offer the same sub-prime junk to completely unworthy souls as they were in the days that led up to the bust?


The answer is a clear no, although there may be evidence on the edges of some risky lending creeping in.


But more than that, there are also signs that increased turnover and higher prices are starting to grip. And those are developments that everyone can be happy with – particularly now, when the mood on Main and Wall Streets is so sour.


Take, for example, the latest new home sale numbers, which have ramped up significantly of late.

New home sales technical

The chart shows volumes climbing back to January 2008 levels, running at an annual pace of 544,000 and up nearly 11% from November’s figure. For the year, sales are up14.5% over 2014’s numbers.


At the same time, the median sale price for new homes has pulled back marginally – a good sign for those seeking more affordability.

slight price technical

Prices may be lower month over month, but the average yearly numbers grew 4% from 2014’s average. And that, too, holds promise.


Look also at existing home sales figures, where the latest increase actually set a record.

highest reading in history technical

The surge in sales for December was a byproduct of several months’ mild weather, a carryover of delayed transactions from November, and an increase in the number of foreign buyers over the last half year whose closures happened to fall at year end.


We’ll have more to say about that last phenomenon in a future letter. Suffice to say for now that a great number of wealthy Chinese have taken advantage of looser currency controls and ponied up to buy American homes in huge numbers.


Have a look here –

international buyers technical

Not only are they buying more properties, but they’re buying the most expensive ones, too. And that has had a markedly beneficial effect on monthly housing figures.


It’s also a trend that doesn’t appear to be letting up. As the chart below shows, trouble on the Shanghai stock market since midsummer has sent wealthy Chinese on a mad dash to get their cash offshore. In 2015, a cool $1 trillion departed the mainland in search of safe havens globally – but the lion’s share parked itself here. Take a look –

highest inflows outflows chart

Until the People’s Republic legislates against this type of activity, the pace will only increase.


And prices will soar.


Look here –

Drying up

With less than four months’ housing supply now available across the board (and falling), a bona fide price spike is very likely on the way.


Playing the Housing Trade


We’ve made good money over the last six weeks playing options on shares of Home Depot (NYSE:HD), a company that’s tied to the housing industry, if only peripherally.


Truth is, the company offers a fair read on the broad industry trend, even if it has almost no connection to the homebuilding business. Its sales of furniture, tools and everything else you might require to renovate or upgrade your digs are, in effect, a keen indicator of the state of American housing.


But before we get to yet another trade with HD, we have one to close.


It was opened on January 14th in a letter called Once…Twice…Three Times a Lady. The trade was a put ratio spread that recommended you buy the HD February 26th 122 PUT for $4.95 and sell two (2) February 26th 116 PUTs for $2.49 each. Total credit on the trade was $0.03.


And what happened?


The stock slid nicely, and we closed out the long leg of the trade last week for $7.60.


Today, we’re asking you to shut down the two short 116 PUTs for $1.74 each.


Buy them back, and your total net on the affair is $412 in two weeks on nothing expended. Assuming $15 in commissions, call it 3300%.


Wow! And today?


As the current chart of Home Depot (below) shows, the stock has gotten stuck to the all-important 137 day moving average. This line is the telltale marker of bull and bear moves for the short to intermediate term, and we trust it utterly. And while no one can be certain which way HD will next trend, it’s certain the stock won’t remain put.


Have a look –

HD technical

She’s gonna move.


We’ve got a downside bias on this one, so we’re going to initiate another ratio spread, while on the upside, we’re going to purchase a straight call.

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Options Trader Elite recommends you consider buying the HD February 26th 121 PUT, now trading for $3.55 and selling three February 26th 113 PUTs, each trading for $1.38, for a total credit of $0.59. Then, purchase the HD February 26th 129 CALL for $0.88. All included, your debit is $0.39.


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Many happy returns,


Matt McAbby

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