Keeping my Eye on

Homebuilders. Is it time to short more? Bloomberg reports that analysts are predicting Freddie Mac will purchase fewer mortgages from banks as they shore up capital.

The government-sponsored company is also considering selling securities and reducing its dividend while it prepares to issue $5.5 billion of stock, McLean, Virginia-based Freddie Mac said in a July 18 filing with the U.S.
Securities and Exchange Commission.

The Fed has agreed to accept Fannie and Freddie debt at the discount window - meaning that Fannie and Freddie can write more IOU's to the Fed any time they want.
In the meantime, the trade the hedge funds will play is to sell Treasuries and buy agency paper. Why? If the Treasury is backing Fannie and Freddie paper, then it's just as good as Treasuries, right? But I only like half of this trade. So, in keeping with my Rule #3 of Investing I am going to buy TBT, the Proshares Ultrashort Lehman 20+ year Treasury ETF.

By the way, here are my Rules of Investing, as I have formulated them so far. I will probably add more later.

Rule #1: Prices are Always Wrong. What this rules means is that I look for the prices that are the most wrong.

Rule #2: Markets first Overreact, then Underreact. What this rule means is that I don't try to time the pop of a bubble or a bounce off the bottom. For example, if something is undervalued, a suitable catalyst comes along, the price should take a nice jump as the market anticipates future developments. The market soon gets ahead of itself and retraces most of this bounce. If the catalyst is still affecting the fundamentals positively, then this is the time to buy, as the market will now be behind the curve on the fundamentals.

Rule #3: Don't Hedge. This rule means that if I see a trade I like, I do it. I don't try to play one thing off another, or capture a "spread." Most hedging trades require leverage, which destroys the supposed safety of having the hedge in the first place. The corollary to this rule is to always make the trade most specific to what you want to do. If you think oil will rise, then buy oil, or as close as you can get to it, such as an oil ETF or futures. Don't buy oil stocks, unless you have an additional reason for choosing the stock, such as buying, say, a company that supplies expensive services to exploration company in order to leverage a long term oil price uptrend that will place a premium on exploration services.