Trade #7—The Home Builders:

Obama isn't a wizard, and while many on Wall Street believe the Democrats will throw money at the housing market, no one can fix the housing mess, it is an intractable problem compounded by a recession. While the first wave of defaults will peak in December of this year, the next generation based on failed option adjustable-rate mortgages and the recession are due to accelerate around the same time. With this level of defaults and foreclosures, home prices will continue to fall according to the experts at Case Shiller.

Freddie Mac (FRE) and Fannie Mae (FNM) are, by statute, required to start shrinking their own balance sheets in 2009, and this in turn will reduce the availability of mortgage money for the low end of the market.

Recommendation:  The big losers will continue to be the home builders with heavy exposure to these markets in southern and western states. KBH Home (KBH) has a weak balance sheet and very heavy exposure to this market, especially in California.