Big Plans

I had big plans for this weekend's blog posts, but as usual I just got too caught up with other stuff. I did accomplish a few nice things - I completed the VPN hookup from home to work and also got a new shelf installed in my room for my shoes. Back on the speculation front it is pretty much more of the same. I am leaning towards shutting the Countrywide short down if it does not react properly in the first days of this coming week.

As I discussed in the first blog posts earlier this month, my two investing ideas for this year are pretty simple and can be summed up as follows: precious metals up, real estate down. Those ideas alone are unfortunately not enough. In practice I had to build 1) the framework for analyzing the real estate downturn and 2) a trading program to speculate in both areas. Luckily I was able to complete both - although their success remains to be tested over the course of this year.

The topic of interest today is how I plan to rotate through the different real estate related sectors on the downside during the course of this year. My plan is to use charts. I will not being using charts to "predict" anything. My only goal is to be able to gauge at what point the particular stock or ETF is at in its decline. I want to primarily focus on sectors or stocks that are below their 50 day / 200 day moving averages. Not all of the stocks in my spreadsheet fit this bill. There are several that are still in clearly defined uptrends - re: Mortgage Insurers, Banks, REITs. As a result I am forced to focus on the weaker areas - re: Homebuilders, Title Insurers, Mortgae Lenders, Mortgage Investments Trusts, etc.

This would seem to be entirely common sense - but I did not capture this detail last fall when I foolhardly shorted the XLF not once but twice during its stratospheric ascent to 33 from 29. As a result I lost money. By focusing on the weaker sectors first, I expect to have some trading gains and slowly build up my capital so that when the other sectors also begin to turn, I will be able to rotate into those that are just becoming vulnerable for greater declines in price. Timing in this endeavor will quite honestly be everything.

I have seen one effective fundamental explanation for the current pace of the rotation (props to Uncle Ben for this insight.) We are seeing the first declines in price in those areas of real estate stocks that are focused on transactional volume. The mortgage lenders, title insurers, and homebuilders must turn over an increasing volume of business to keep their earnings growth rates up. If we have a decline in growth of home purchases - it should show up in these areas first. Sure enough if we look at the charts - that is the case.

Best Regards,

BG