WHIPSAWED

Peter M.: ‘I was short NTMD like you but covered at a loss when it broke above 23. Now I am long it. Can’t beat them, join them. I will ride it till before the conference call on July 15th. Eventually I would like to short this baby again. How about your short? Are you gonna ride it till NTMD comes home to roost?’

☞ Peter and I have a different strategy. I like to buy undervalued stocks and short overvalued ones. It’s boring, but the odds in the long run are pretty good – or they would be, anyway, if I could reliably identify over- and undervalued stocks. NTMD, which I believe is overvalued, closed last night at $21.86, so Peter took a loss when it went up and now has a small paper loss, as it’s gone down. This may impel him to take that loss as well and go short again. It’s called ‘getting whipsawed.’ I have no idea what will go on during the conference call. (I didn’t know there was a conference call.) I assume the company will be brimming with optimism. But I expect the analysts on the call may ask pointed questions. E.g., why will patients and insurance companies pay six or seven times the price for a pill whose two components are readily available separately for a tiny fraction of the cost? And how will you make money on the many patients to whom you’ve pledged to give the pill free?

SECOND MORTGAGE

Mark L: ‘The recent postings about the real estate bubble got me to thinking about getting a second mortgage. I bought my first house, in Northern California, just over a year ago, thinking I must be buying at the top of the market, but lo and behold the house has appreciated about 25% – slightly more than my 20% down payment (which was a huge chunk of my savings, and still is). We got a 30-year fixed mortgage at 5.5%, which is a great loan, and I don’t want to mess with it. I’ve been wondering for a while how to hedge against (what I think is) an inevitable drop in real estate values and thought of a second mortgage. I can pull out my entire down payment, plus a little extra, at a 7% interest rate (the lender on the second will allow us to borrow up to 90% loan-to-value), which would give me a “blended” rate on the two loans below 6%. If you had told me last year that I could finance 100% of my house at under 6%, I would have jumped at the chance. So shouldn’t I do it now? I should hasten to add that I have no intention of buying a boat with the proceeds! It would just be nice to have a liquid cushion instead of most of my savings tied up in the house. I figure I could invest 1/3 of the proceeds in short term treasuries, 1/3 in a domestic equity index fund, and 1/3 in an international index fund. Simple, inexpensive, and much more diversified than having all that money in one thing (the house). Obviously I’m paying a premium for the liquidity, and it’s another sizable (though partially tax deductible) payment we’ll have to make every month, but if short term rates keep climbing, even a 7% loan may look very cheap in a few years. Any thoughts?’

☞ I’d consider setting up a home equity loan that allows you to borrow against the value of the house, should you really need to. But would I actually borrow money at 7% today? Being a conservative type – no.

You’ll lose money on the Treasuries, and what if the stocks drop instead of rise? Eventually, they would likely come back; but might you be too scared at that point and sell out at a loss? (See: Whipsawed, above.)

Why not take the payments you’d make on the second mortgage and just put THAT straight into the index funds each month? (Or build a rainy day fund with it first if you prefer.)

Vive la France!

 

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