Housing Recovery: A Way to Play It

The Macro Markets Housing Investment Trusts (UMM(UMM Quote) and DMM(DMM Quote)) have been publicly traded for approximately one month now.

These are trusts holding U.S. Treasury securities designed to track three times the movement of the Case-Schiller Composite-10 Housing Price Index. The pair is a closed system; when the index moves 1%, 3% of the assets in one trust are moved to the other trust. This move defines a change in the net asset value of each trust, one up -- UMM -- and the other -- DMM -- down.

Investors have not become acquainted with how these new investment trusts work. When they do, I think they will become very popular. Now, while they are not well followed, there may be frequent inefficiencies that will lead to great trading opportunities for people trading volumes less than a few percent of the average daily trading volumes. I, for one, am going to be looking for small position opportunities here.

Let's expand this with a specific hypothetical example. If the current net asset values of the two trusts were both $25, and the Composite-10 decreases by 1%, 3% of UMM (75 cents) transfers from that trust to DMM. The resulting NAVs change to $25.75 for DMM and $24.25 for UMM.

The trading prices of the two trusts are determined by market traders. If the resulting market prices are $25.50 for DMM (vs. NAV of $25.75) and $24.60 for UMM (vs. $24.25 NAV), this implies a market opinion that house prices (indicated by the Composite-10) will be increased from today's level at the trust termination date, which for the current trusts is August 2014.