Add SRS Calls

Real Estate “Bottom” Nowhere Close

By Bryan Bottarelli
Tuesday, April 21, 2009 1:25 PM EDT
Tue, 21 Apr 2009 17:25:00 GMT

PLAY: Buy the SRS May 32 Calls (SAK EZ) at or under $4.30, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $6.50.

Dear Bottarelli Research Member,

Right now, I think the entire stock market is utterly clueless. Case in point, just look at the recent moves we’ve seen in the financial sector.

Over the last five weeks, for example, the market sentiment indicated that all was “on the mend” in the financial sector. Wells Fargo was achieving record profits. Goldman was back over $100 per share. TARP money was being repaid.

Then, news started to surface about the results of the stress test. In fact, it’s been widely reported that the Fed and the Treasury are very concerned about how to release these results. And yesterday, in response to these rumors, the markets moved aggressively lower, lead by the financials. In my view, the only reason that there’s been a delay in reporting the stress test findings is because nobody has been able to conjure up a way to positively spin the results. They’re truly that bad.

This leads us to today. After yesterday’s crushing sell-off, the Blue Chips are attempting to put in a rally. And guess which sector is leading the upside move? You guessed it, the financials! As I write, the FAZ is down 16%. And that’s after opening today’s session aggressively higher. Like I said above, this market is clueless. As a result, there could come a time in the very near future when we re-enter FAZ calls. Stay tuned.

FAZ

In the meantime, I’d like to try out a new Ultra play, which comes in the form of the UltraShort Real Estate ProShares (SRS).The SRS moves at a rate of twice the inverse of the Dow Jones U.S. Real Estate Index. Similar to the FAZ, the SRS has fallen aggressively in recent action. But if you study the time-horizon and the percentage decrease of past real estate collapses, you’ll realize that real estate is nowhere near the bottom.

All told, housing prices are down 28% from their bubble peak in 2006, but they still have a ways down to go before getting back to their pre-bubble levels. You see, the average real estate crisis sheds 35.5% off the value of homes. The worst crisis on record peeled off 54%. So, if we’re experiencing just an “average” crisis, you can expect prices to move down another 7% to 10%. In the world of real estate, this move could easily take another year or two. Now, if we hit the levels that we reached during the worst-ever crisis, you can expect another 26% drop. In other words, we could be only halfway through the current crisis. Ouch. In short, you can expect more problems in the commercial real estate sector. As a result, adding SRS calls makes a lot of sense. Let’s take advantage of today’s dip and establish a new position now.

SRS

PLAY: Buy the SRS May 32 Calls (SAK EZ) at or under $4.30, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $6.50.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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