Fannie Mae (NYSE: FNM) stock is declining this morning on news that mortgage application volume tumbled 22.6% during the week ending February 15, according to the Mortgage Bankers Association's weekly application survey. However, housing starts improved, which is helping to offset the sting of lower applications with the hope that future numbers will be better. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on FNM.

After hitting a one-year high of $70.57 in August, the stock hit a one-year low of $26.38 in November. This morning, FNM opened at $28.53. So far today the stock has hit a low of $28.05 and a high of $28.99. As of 11:00, FNM is trading at $28.80, down $0.18 (-0.6%). The chart for FNM looks bullish but deteriorating, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.

For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $45 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in four months as long as FNM is below $45 at June expiration. Fannie Mae would have to rise by more than 57% before we would start to lose money.

Condo starts helped to increase the annual rate for housing starts by 3% to 1.229. They were expected to fall to 1.17 from the 1.191 million in September, so that's good news. While single family home starts did drop to an 884,000 annual rate, which is the lowest rate in 16 years, multifamily home starts rose to a 345,000 annual rate. Don't get too excited though. Multifamily homes declined 36% in September, so this 44% increase is primarily because of delays in starts from September that spilled over into October.

Richard Moody, Chief Economist for Mission Residential, prefers to look at the six month moving average to see what's really happening in housing because that tends to smooth out the ups and downs of the market. The six-month moving average for single family homes is down to its lowest point since October 1992. He added, "This is not, however, the bottom, or even close to it - total housing permits fell by 4.6%, while single family permits dropped by 6.1%. This brings the moving average for single family permits to its lowest level since August 1995.

During the first week in November, consumer confidence tumbled downward to the lowest level since Hurricane Katrina, based on reports this morning. Yes -- that is the lowest level since the summer of 2005. What changed from October? Well, never underestimate the power of the media to take situations like energy prices (oil prices) and the messy house market (foreclosures and more) and extol all the bad virtues into every nightly newscast to give the public a certain perception. It happens.

The RBC Cash Index moved from over 80 to just 64 from the October to November, with the stock market's highs in October now wearing off as the DJIA settles into the sub-14,000 rage once again.

But my my, how a few weeks can change things. Oil prices consistently nearing the $100/barrel level and with so many houses on the market (and with new credit expectations for millions of buyers) caused the confidence level to plunge.

Huge losses at Merrill Lynch and Citicorp -- tied directly to subprime mortgages -- have shaken some investors as well, although they should not. Stupid decisions by financial CEOs don't make for a shaky economy, right? But then again, consumer confidence is just that - confidence. Reality can be quite different in the end.

Things keep getting worse and builders get more and more cautious. In fact, according to the Commerce Department's most recent survey, housing starts dropped 10% to an annual pace of 1.19 million in September from a 1.33 million rate in August. That's worse than economists expected. Briefing.com's survey showed economists estimated a more modest fall to 1.29 million.

We haven't seen a housing market this weak since 1993 and the future doesn't look any better. Housing permits were down 7% to an annual rate of 1.23 million in September from 1.32 in August. That's the lowest level for permits in 12 years.

This news follows the report that the Mortgage Bankers Association will release today at its annual convention indicating falling mortgage originations and a builder's confidence survey that was released Tuesday indicating that builder's confidence is at record low levels. The nation's builders are hit hard. The most recent to report was the nation's largest, D. R. Horton (NYSE: DHI), whose orders dropped by 39%. Last week, Moody's downgraded Lennar (NYSE: LEN), Centex (NYSE: CTX) and Pulte (NYSE: PHM) homes to junk bond status.

Toll Brothers Inc. (NYSE: TOL) may be worth considering for the truly adventurous and patient investor.

The luxury home builder today posted better-than-expected second quarter results. Granted, expectations were lower than a limbo poll because the Horsham, Pa.-based company already said it wasn't going to be able to hit earlier profit forecast.

Net income fell 79 percent to $36.7 million, or 22 cents per share from $174.9 million, or $1.06 per share, a year earlier. Revenue fell 19 percent to $1.17 billion The profit beat analysts' expectations of 14 cents a share, according to Reuters.

There were a few bright spots.

Toll's cancellation rate fell to 19 percent, down from 30 percent in the first fiscal quarter and 37 percent a year earlier. The backlog, though high, was $4.15 billion at the end of the quarter, down from $6.07 billion a year earlier.

This doesn't mean that the housing markes has turned. What it may indicate, though, is that slowly but surely things eventually will get better. The company. which says the overall market remains "soft," already is seeing some signs of improvement in markets such as New York City, the Philadelphia suburbs, Raleigh. Austin and Silicon Valley in California.

Shares of Toll are down about 8 percent this year. They trade at a forward price-to-earnings multiple of 18. Four analysts rate the company either a buy or a strong buy compared with 9 who consider it a hold. The average price target is $30.50. slightly higher than where it trades today.

Has the bad news already been factored into the stock? Perhaps. The shares do seem reasonably priced.

Happier times will come to Toll eventually. It's just a question of when.

There is a battle going on at the Federal Reserve. However, it's not the internal battle that we normally envision. This is a battle of wills between Chairman Ben Bernanke and the experts on Wall Street.

On one side, we have Dr. Bernanke, the current Chairman of the Federal Reserve. He has made it quite clear that he sees no reason to change interest rates for the foreseeable future unless economic data indicates a need to do so or a crisis occurs. He believes that the housing slowdown is contained, and that the gradual slowing of the economy should contain inflationary pressures.

On the other hand, we have the Wall Street experts. They believe that the economy is much worse than the data indicates with a potential recession on the horizon. In their view, it is only a matter of time before the Fed is forced to lower rates. By the way, Wall Street has a slight conflict of interest here since lower rates or the expectation of them in the near future will probably fuel a stock market rally.

Home Depot's (NYSE:HD) CFO Carol Tome expects an economic slowdown between now and the end of 2007, a slowdown lasting roughly one year. Back in September, the retailer said that sales for the remainder of 2006 would come in at the low end of a range of 14% to 17% growth, and for per-share earnings to increase at the low end of a 10% to 14% range. In 2007, sales could slow considerably.

Tome said that Home Depot's worst-case scenario would be for the U.S. housing market and economy to slow to a point where sales at comparable Home Depot stores -- known as "same-store sales" -- could decrease by single-digit percentages of around 4 to 6 percent.

In what seems like the most obvious statement that could be given by a CFO, Tome said that Home Depot's strong balance sheet should allow the company to weather an economic slump while continuing to enhance its overall core retail business.

I'm not sure how a "core business" can be enhanced when the shopping segment temporarily dries up, except for loading more selections and possible categories into Home Depot stores to steal customers from other retailers as everyone fights for every single consumer penny -- especially in a slowdown.

The Commerce Department reported housing starts at a annual rate of 1.957 million units last month, an increase of 5% from April. This is better than the expected 1.86 million estimate and comes after three consecutive declines: 5.5% in April, 7.5% in March, 5.9% in February.

Economists were split on the direction of May U.S. housing starts, with many believing builders hadn't fully responded to a weakening in home sales. Yet most increased their expectations for the May number.

No doubt the Federal Reserve is keeping a close eye on this one as housing starts had pointed in prior years to a strong consumer and good prospects for economic growth.

The increase in construction of new homes and apartments was helped by dry weather.  However, analysts do point out that activity in the housing market is still expected to slow down in the next few months due to rising mortgage rates, just as the building permits number indicates.

Building permits in May were worse than expected at 1.932 million units, a drop of 2.1%. Another indicator of slowdown was The National Association of Home Builders confidence index, reported yesterday, which fell to 42 in June, the lowest point in 11 years.

As I indicated in the Before the Bell posts earlier this morning, I still expect markets to be mixed for the next month at the very least.  The housing market data released this morning could create some optimism at first. But all in all, the numbers don't point to much new.  Just as the good news about the narrowing trade deficit did nothing to alleviate investors' fears of further rate hikes and a slowdown in economic growth, this up-tick in housing starts will probably have the same negligible effect.