The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, September 1, 2004
Email – #195
** Stretch That Bubble
I remember as a youngster having bubble-blowing contests. We would wad up the gum and chew until we were blue in the face. Then we would try and blow the biggest bubble possible. I remember a friend, David Northey, would blow a bubble so big, it could hide his entire face. Today, my young daughters indulge in similar activities with their bubble gum.
The result of these contests are always the same. The bubble bursts and there is a mess to clean up. That’s what is happening in the housing market today. Our Toll Brothers put is not faring well… yet. But there is no lack of evidence that the bubble in housing will pop and when it does, housing shares will be leading the parade down REGARDLESS of their perceived fundamental value. More on this in a moment.
$418 a Day
That is how much home prices increased in the last 12 months in San Diego. The median home price went up an astounding $152,000 last year. Only 10% of the city’s population can afford to buy a median priced home, now in the $400,000 range.
Housing inventory reached four months nationwide last month for the first time in a couple of years.
Lumber prices are at highs. Concrete supplies are short. Prices for everything related to housing is soaring. So is the debt level that many are saddling themselves with to buy the most house for the dollar.
Two MAJOR hurricanes will have hit the U.S. by this coming Monday… and we have not even reached the mid point of this year’s hurricane season. The two hurricanes will have an adverse impact on housing supplies like lumber and concrete.
All the while Toll Brothers is humming a happy tune. That happy tune is based on the number of non-binding contracts on its books. What is yet to be seen is whether those contracts will become solid housing agreements in the future.
Homebuilding stock prices are very similar to those of automakers. They trade at ridiculously low price/earnings ratios. Toll is trading at only 10 times earnings while the S&P is close to 30. Why? The answer is that investors realize that housing, like auto sales has never displayed a consistent pattern of growth over time. In fact the opposite is true. These two businesses ebb and flow with consumer attitudes, confidence and the interest rates. Right now all three are pointing in the wrong direction. Add to this higher energy prices and years of overheating in the housing market and you have the makings of a significant profit opportunity being short. I hope we will have the opportunity to take advantage of inevitable profits without being stopped out first.
Maintain your Toll put position. I feel confident that we are closer to the highs than the lows in this company.
Regards,
Karim Rahemtulla
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Current Portfolio:
Company / Symbol: Toll Brothers (NYSE: TOL)
Option / Symbol: Jan 06 $35 put (YKW-MG)
Date Purchased: 8/12/04
Current Price: $3.30
Comment: Hold. TS is $2.10.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Jan 06 $40 call (YRH-AH)
Date Purchased: 7/23/04
Current Price: $1.70
Comment: Hold. No TS.
Company / Symbol: Semiconductor Holders Trust (AMEX: SMH)
Option / Symbol: Sold Jan 06 $45 call (YRH-AI)
Date Purchased: 7/23/04
Current Price: $0.90
Comment: Hold. Sold call against Jan 06 $40 position.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan 07 $5 call (VCB-AA)
Date Purchased: 6/22/04
Current Price: $0.30
Comment: Hold. No TS.
Company / Symbol: Ciena (Nasdaq: CIEN)
Option / Symbol: Jan 05 $5 call (EUQ-AA)
Date Purchased: 7/23/04
Current Price: $0.10
Comment: Hold. Sold call against Jan 07 $5 position.
Company / Symbol: Lucent (NYSE: LU)
Option / Symbol: Jan 06 $5 call (YXL-AA)
Date Purchased: 5/25/04
Current Price: $0.30
Comment: Hold. No TS.
Company / Symbol: Dynegy (NYSE: DYN)
Option / Symbol: Jan 06 $5 call (YNY-AA)
Date Purchased: 5/25/04
Current Price: $0.95
Comment: Hold. No TS.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Sell Jan 06 $25 call (YDI-AE)
Date Purchased: 4/1/04
Current Price: $1.10
Comment: Hold. Sold call against Jan 06 $20 position.
Company / Symbol: Placer Dome (NYSE: PDG)
Option / Symbol: Jan 06 $20 call (YDI-AD)
Date Purchased: 1/23/04
Current Price: $2.15
Comment: Hold. No TS.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Sell Jan 06 $30 call (WIK-AF)
Date Purchased: 2/9/04
Current Price: $0.05
Comment: Hold. Sold call against Jan 06 $30 position.
Company / Symbol: Nokia (NYSE: NOK)
Option / Symbol: Jan. 06 $22.50 call (WIK-AX)
Date Purchased: 8/29/03
Current Price: $0.15
Comment: Hold. No TS.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Sold Jan 06 $15 call (WZY-AC)
Date Purchased: 11/6/03
Current Price: $2.20
Comment: Hold. Sold call against Jan 06 $12.50 position.
Company / Symbol: Chesapeake Energy (NYSE: CHK)
Option / Symbol: Jan 06 $12.50 call (WZY-AV)
Date Purchased: 7/28/03
Current Price: $3.30
Comment: Hold. No TS.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $10.34
Comment: Buy under $10. No TS.
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Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club. The editor of The Smart Options E-Report, The Income Trader – A Covered Call Strategy and The LEAPS Option Trader, Karim is also a regular contributor to The Oxford Club Communiqué. His highly successful trading systems use covered calls and LEAPS to boost returns on blue chip stocks, and during the bear markets of 2000 and 2001, his picks outperformed the major market averages. Educated in England, Canada and the U.S. and fluent in several languages, Karim travels the world to find the best investment opportunities for our members.
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