Do More Stable Home Prices Make UMM A Buy?

August 26, 2009

The first quarterly increase in the S&P/Case-Shiller U.S. National Home Price Index in three years certainly has warmed the hearts of investors. Now, MacroShares has given them a way to play. Should they?

I’ll cut to the chase: I don’t think so.

The good news definitely made the normal news rounds, and lacking anything else to say, the normal punditry glommed on to the numbers as an excuse for the paltry 30 basis point gain in yesterday’s stock market. Let’s put the numbers in perspective though. Here’s the chart that has everyone so excited:


&P/Case-Shiller Index (10-City Composite) Jan 2000 - Jan 2009


I’ll admit, that little fishhook on the end is starting to look like good news, especially when you consider that, as a monthly index with a two-month lag, the Case-Shiller is a smooth, trendy index to start with.

But on reading the news of this miraculous 1.4% increase in national home prices in June, I immediately turned to the new MacroShares products that let you bet on the movement of these indexes: UMM and DMM.

I was somewhat shocked to discover how volatile they’ve been. Here’s the trading pattern for the two funds in the two months since they launched, with our friend the S&P 500 just for comparison:


DMM vs S&P 500 vs DMM - 6/29/09 - 8/24/09


After doing a Looney Tunes spit-take, I immediately remembered the quirk of the MacroShares products.

The two funds are essentially like zero coupon bonds, or maybe cash-settled futures: If you invest now, you’ll be returned money based on three-times the accumulation of the Case-Shiller 10 City Composite Index between Dec. 31, 2008 and Aug. 31, 2014. Along the way, the underlying value of the fund will be adjusted to represent its path toward that ultimate goal – so today, the fund’s underlying value will be adjusted to represent this 1.5% increase in home prices.

But that change in underlying value is almost irrelevant to how UMM and DMM trade.

As of last night, the underlying value of the UMM, for instance, had only changed 60 basis points since inception at the end of June. And yet UMM has swung 30% to either side of zero. In other words, the real-world performance of an investment in UMM or DMM has been almost entirely premium and discount:


UMM vs DMM - 6/29/09 - 8/24/09


Unlike the debacle we’ve seen in commodities futures funds these last two weeks, this is exactly what the UMM/DMM pair is supposed to do. The market price of UMM is a pure capitalist auction on where home prices will be in 2014, with little regard for where they are today.

If you buy UMM at a 30% premium, that means you won’t make a dime on your investment unless the underlying value of the index is up MORE than that in 2014 (recognizing that UMM is levered, that’s really only a 10% gain).

But unless you’re actually planning on holding all the way to the end, what you’re really investing in is sentiment. Right now, the “consensus” is that the housing market will rise about 8% between now and August 2014, as represented by the 25% premium in UMM. Your bet isn’t on prices going up, it’s on prices going up quite a bit more than they already have.

Dave Nadig is research director at He welcomes comments and suggestions for future columns at: [email protected].


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