Bad News Bull

You're in for a treat, sports fans! My buddy and fellow ChangeWave analyst, Michael Shulman, will be filling in today to deliver our "Rant of the Week." Watch the video to get his take on the housing market and learn how he can help investors like you double your money, even in this lousy market. And don't forget the "Ask Toby" video. This week I discuss a metal stock that's a great buy right now.

Toby

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Double Your Money in an Ugly Market

Watch a video of today’s rant.
Or listen.

EDITOR'S NOTE: ChangeWave Shorts Editor Michael Shulman is filling in for Toby Smith this week.

ChangeWave Shorts is a service designed to make you money as stocks go down.

It doesn't matter which direction the market is headed, a bad company means a lousy stock. And using proprietary ChangeWave research and third-party data, my goal is to get ahead of Wall Street in identifying weak sectors and companies to help my subscribers make a ton of money using simple put option plays.

Today I want to talk about the housing market and homebuilders, which is the epicenter of all that's going wrong in the stock market right now.

You can double your money in this lousy market -- yes, double -- if you understand what is really happening in the housing sector.

Homebuilders are being propped up by hope and hype, and are currently in survival mode. The issue for them this summer is the ability to get new financing to sustain their businesses or pay off old debt.

Last week, the consumer confidence number came in at its worst level since 1967 in terms of people's expectations for the rest of the year. The pundits put most of the blame on $4-per-gallon gasoline, but the real villain may be home prices.

Am I exaggerating?

No.

The Case-Shiller home price index -- one of the most widely used gauges for home prices -- was down more than 15% in May compared to 2007. And analysts expect another 10% to 15% drop. Add inflation into the equation and home prices will be down by one-third before this whole mess is finished.

Why am I so certain?

Just follow the money lent and track when mortgages were given to weak, and then even weaker borrowers.

Things Are Worse Than They Appear

My forecast, which is based on mortgages, foreclosures, inventory and housing starts -- i.e., hard data rather than rainbows and wishes -- is for home prices to hit bottom and stabilize in the first or second quarter of 2011.

Right now many analysts are calling for a bottom, in part because housing starts dropped below 1 million -- the historic level of most bottoms. But these analysts seem to be ignoring the current and projected rate of foreclosures.

If you add the number of foreclosures each month above the historical trend to the supposedly low number of new homes being built, you have what I call a "synthetic housing starts" figure. That figure is now almost equal to housing starts at the peak of the building boom in 2006 -- roughly 1.8 million units.

Currently, almost 9% of homeowners are in default or foreclosure -- that's 4.8 million homes. With 1.2 million of these homes already foreclosed upon, that leaves 3.6 million potential candidates.

If just 50% of those homeowners find themselves in foreclosure, that's another 1.8 million homes that will enter the market on top of the already extraordinarily high inventory levels that are increasing each month.

Help On the Way? Don't Count on It

There is a housing bill currently before Congress that is almost cruel in its cynicism. Supposedly designed to help homeowners, the real intention, as you might guess, is to help the banks.

Of the more than 600,000 homeowners that will be affected by this bill, my guess is that maybe one-third or fewer will be helped.

For argument's sake, let's double my estimate and say that 400,000 homeowners will be bailed out by this legislation. That's only a couple of month's worth of foreclosures.

This bill is not going to do much, folks, and outside of Uncle Sam, there isn't any kind of relief on the way. Mortgage rates are rising, loan applications continue to decline, and the spring and early summer sale seasons were a total bust.

Even well-heeled borrowers are now mailing back the keys to their second homes and investment properties because they're worth far less than what they borrowed, even if they can afford the monthly payments.

This housing virus has even spread to home equity loans that many used as a down payment for their original home purchase.

Double Down

So, what does this mean for investors?

Banks will continue to get whacked and consumers scrambling for gas money will keep cutting back their spending. This, in turn, will hit companies that depend on discretionary spending from Expedia (EXPE) to Tiffany & Co. (TIF).

Many analysts now realize that the banks don't know how much toxic waste they actually have on their balance sheets or in off-balance-sheet entities that they eventually will be responsible for -- another fallout from the housing crisis.

Citigroup (C) and Lehman Brothers' (LEH) recent announcements of more write-offs than anticipated helped move Wall Street sentiment along. As for you consumers, well, just go to a mall.

I just bought pants at Nordstrom (JWN) -- too much discretionary eating -- and they were altered and ready for pickup in three days. Last year it took 10 days, and a couple of years ago it might have taken two weeks. Now I even get e-mail solicitations from Ralph Lauren (RL) to shop at its outlet stores as opposed to its regular stores.

What I'm trying to say here is that things don't look pretty for long-only investors. But I fully expect to make a ton of money on the short side during the next six months, and I want you to join me. I've already had 15 closed trades this year in my ChangeWave Shorts service that were doubles or better.

You, too, can start making money-doubling trades in this lousy market by joining ChangeWave Shorts.

Michael Shulman

Editor, ChangeWave Shorts

P.S. Rather than letting this ugly market get you down, why not try profiting from it with ChangeWave Shorts? Get in on Michael's money-doubling trades, and soon you'll be profiting regardless of the market's direction.

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Ask Toby: Metal Stocks

Watch.
Or listen.

The bigger names in this sector recently ran up. In today's video, Toby tells you which company is still a good buy.

Watch 'Bulls & Bears' on Fox News

Be sure to tune in to Fox News Channel this weekend and join Toby and the crew on "Bulls & Bears" for their weekly market roundtable as they kick off the Fox News Channel business block on Saturday, July 12, at 10 a.m. Eastern. ("Bulls & Bears" replays at 4 p.m. Eastern, Sunday, July 13, and 4 a.m. Eastern, Monday, July 14.) Or you can catch the show Saturday evenings at 6 p.m. Eastern on the new Fox Business Network.

Check your local cable listings or satellite guide to find the Fox News Channel location and times for your area. NOTE: These shows are NOT on your local Fox network station. They are on Fox News Channel on your cable or satellite system (Channel 360 on DirecTV, Channel 205 on Dish Network). Keep in mind that these schedules are subject to change, and the Fox News Channel business block and other programming may be pre-empted for breaking news events.

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Wine Find: Argentinean Delight

Today's wine find is from my buddy, Guimar, who suggests the Alto las Hormigas Malbec Mendoza.

This Argentinean vino sells for around $10 per bottle, and he's sure it'll beat almost any expensive California wine.

Check out these tasting notes on the 2007 vintage:

"Violet, vivid color, truly varietal nose, with notes of cherry and blackberry, that come out clear and intense. Its true character lies in the palate impression, where structure, freshness and persistence combine giving a very pleasant harmony."

Great work, Guimar! Keep the finds coming, my friends.

To share your favorite wine or food experience, e-mail me through the form at: www.changewave.com.

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