Housing starts and permits for July are out tomorrow; ahead of the data, I will have the CEO of MacroShares on Closing Bell at 3:40 ET today.
While everyone is debating when home prices will bottom, MacroShares (which premiered in June) allows investors to make a direct bet on housing.
The brainchild of Robert Shiller and Carl Case of Case-Shiller fame, the MacroShares Major Metro Up and Major Metro Down delivers 300 percent of upward and downward movements of the S&P/Case Shiller Home Price 10 Index of ten major cities.
The fund expires in November 2014 (the creators wanted a 5-year investment), when investors will receive a payment based on 300 percent of the change in the index from Dec. 31, 2008 through August 31, 2014.
The index is not like a commodity ETF; it does not hold an underlying basket of houses. Instead, it holds Treasury securities and cash, and shift assets according to the movement of the underlying indexes.
Every 2nd Tuesday of the month Case Shiller releases new numbers, and they’ll shift assets according to the changes in the index.
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In between, traders are essentially betting on the direction of home prices five years from now. The two may trade at premiums or discounts to their underlying value.
Any time UMM trades at a premium to its underlying value people are bullish on home prices (in 2014); when it trades at a discount they are bearish.
So if you go to Macromarkets.com, you will see a "Future Home Price Change." Today it says "+3.45%," meaning that investors are anticipating home prices in the 10-city index will be up an average of 3.45 percent when the security terminates in November, 2014.
Buying UMM is a pure play on where investors think home prices will be going. It's like buying a gold bar instead of a gold stock; some people want gold bars because they want a pure play on gold prices, whereas buying gold stocks is often a play on how well gold miners can get the gold and how well they hedge.
Similarly buying the UMM and DMM is more of a pure play on just where home prices are going, whereas buying home builders is partly a play on the individual builder's balance sheet, not just on the direction of home prices.
For a fuller explanation on how the indices work, go to Macroshares.com.
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