If you're not familiar with the real estate cycle, let me enlighten you... let me explain... so you understand the reality of the situation, which couldn't be further from the version you might read about in the papers, or listen or see anywhere else... You need to know this because, tonight, I'm going to tell you about a stock that I think is the single-best speculative play, because it is Speculation Friday, on the housing bottom...

Alright, here's how it really works... not like some housing number, that everyone says, oh boy, foreclosures are so bad... This is how it works, step by step...

1st Phase
First, prices go - this is the top of the cycle - prices go up, causing transactions to go up... more people buying and selling... and that's met with an intense supply of new homes, and that's how we get the top... prices go up, buyers go up, then we get new supply.

 

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2nd Phase
Then, prices go up but transactions go down... because nobody wants to pay those prices... California... 2006.

 

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3rd Phase
After that, prices go down and transactions go down... Even as prices fall, very few people want to buy, because it feels like the bottom's falling out of the housing market. That's a feeling that all of us know well at this point.

 

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4th Phase
California was in that stage of the cycle until two months ago, when we got to the 4th phase... What changed? Prices have at least stabilized, but transactions are roaring, because there are, at last, lots of interested buyers.

That is how real estate has bottomed over and over again. That's why who ridicule my bottom call do not understand the cycle. Because that's where California is right now.

I want you to take a look... Go onto page A4 of The Wall Street Journal... and even right here, they have to acknowledge the fact... even this paper, even this paper had to acknowledge signs of a housing bottom... Why would they print something like that... a headline that might actually put a smile on your face? Because prices for existing homes in California rose 1.4% in April, from March... the second consecutive price increase. The median home price in California, $256,000 in April, up from $253,000 in March. It's still off 36.5% from where they were a year ago. Remember the cycle, stage 3, was that prices come down, but no one takes it?...

Okay now... more important was the transactions...

540,360 homes were sold in California last month. That's up 49.2% from a year ago... prices come down, transactions go up. That's the bottom, right? That's the cycle.

How about inventory?... Down to 4.8 months supply from 9.8 months a year ago. That is the definition of the bottom in the real estate cycle. And we didn't even need to adapt to FDR's Agriculture Adjustment Act style policy of burning down excess homes to raise prices... So you can read all you want about how foreclosures are skyrocketing which, by the way, they aren't... or the number of people who can't afford to pay going up dramatically. In fact, it has barely moved the needle... not nearly as much as I would of expected, given the garden-variety depression we just came through.

See, none of that matters... Contra Mark Twain... the stats don't lie. And they say that housing has bottomed in the most important state. That's important for two reasons.

First, as everyone knows, as goes California, so goes the rest of the country. The state where the housing mess started, I think, will lead us out of this. And, beyond that, California alone is responsible, literally, for 50% of the housing decline problems in the entire country. It might even be more than that if you go look at the J.P. Morgan presentation this week.

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The bottom is here and it's for real. The story in The Wall Street Journal did everything but tell you how to play it. That's my job...

I think the best way to speculate that the housing cycle has bottomed... and it has bottomed... is Bank of America (BAC)... Oh, some board member resigned. I had to put that in because it's breaking news... The guy was completely irrelevant... Oh that's okay... I shouldn't say that, right... everyone's relevant... every story's equal...

Anyway... why play this with a bank and not a homebuilder?...

Remember, unlike a homebuilder, Bank of America doesn't care about the price of a home. Homebuilders want the prices up and they're shrinking. It's levered from the number of sales from both Countrywide, which it acquired, and its own mortgage division. Bank of America has the most market share in what's becoming an explosive real estate market, with California representing 36% of total residential mortgages. I bet that figure goes even higher.

Plus banks are selling their own inventory of foreclosed homes, which gets them off the rolls of its non-performing loans.

Yet, this bank that the professors were calling "insolvent"... Remember how that Nouriel Roubini... that buffoon... wanted to turn Bank of America into a ward of the state?... I mean, this thing could be ready to soar... something you already know if you haven't gotten all caught up in the negativity from the press...

As soon as Bank of America finishes selling the last of its shares that it's offering in the open market, and starts repaying TARP, this one's off to the races. And the fact that mortgage rates are going up... that's a positive, not a negative. Why? Because when home prices are going up, supply is going down, and rates are going up, it forces potential buyers off the sidelines. That's what's happening right now.

How about Merrill Lynch? Isn't that weighing Bank of America down like cement galoshes?...

You know what? The charges have been taken. The bad loans are off the books. John Thain is no longer killing the bank's bottom line with that huge salary of his and bonuses for his cronies, not to mention his pricy office furniture...

And we're now starting to see the strength of Merrill's asset management business, not to mention all the fees it gets on all these debt deals, now that the credit markets have unfrozen... and the power of its great brand... Plus, even though Merrill has reduced its headcount by 40%, its combined Pro Forma market share has remained unchanged in 2009, versus last year. That's impressive.

Merrill is in on all of the deals. It's now a positive for Bank of America.

Here's the bottom line...