I have not really discussed SRS much since technicals really are not giving us any indication that it has life. But, I think now is the time to start putting a bit into the long term portfolio, despite the so-called decay syndrome.
It may not do much for the next month or two or three, but there is a big red flag out there right now that may be a leading indicator that REITs are headed for troubled waters.
Interest rates. Interest rates are rising quickly and to the point that refinancing and getting loans in general are less attractive. REITs had their day with the fed's move of purchasing treasuries and driving down long term rates to a very attractive and affordable 4.50% range. Now they are well above 5.50% and pushing 5.75%.
I believe the drop in interest rates to 4.50% gave REITs and commercial real estate some hope. But as I always mention, every action has an equal and opposite reaction and with rates now back to more reasonable levels, the reaction may be that REITs really struggle in the months to come.
That said, the gov't is standing by to try to help bailout CRE if necessary. So far it has not been necessary because of low interest rates. And they can't ask congress for another trillion dollars to bail them out. So they have to wait to really insure banks are stable before offering help in CRE. Therefore, before jumping "all-in" on SRS, always keep that in mind.
My suggestion is, wait until SRS crosses its 20 day moving average before jumping in much. Whether you hit the bottom at 17 or at 20 really won't matter much if SRS gets back to more historical levels of 75-120. Notice the chart above. Decay really is not as big of a factor with SRS. It is being impacted dramatically by low Q1 interest rates which are now gone. I suspect we will re-enter the 75-120 range by end of Q3 as 5.75% interest rates take effect.
SRS is not dead, it is just hibernating and interest rates may be the ticket for its return. The CRE market is totally irrational now but it has been hiding behind the low interest rates as its safe haven. It can't do that any longer and thus cash flows will be shrinking, and quickly once the **it hits the fan.
It may not do much for the next month or two or three, but there is a big red flag out there right now that may be a leading indicator that REITs are headed for troubled waters.
Interest rates. Interest rates are rising quickly and to the point that refinancing and getting loans in general are less attractive. REITs had their day with the fed's move of purchasing treasuries and driving down long term rates to a very attractive and affordable 4.50% range. Now they are well above 5.50% and pushing 5.75%.
I believe the drop in interest rates to 4.50% gave REITs and commercial real estate some hope. But as I always mention, every action has an equal and opposite reaction and with rates now back to more reasonable levels, the reaction may be that REITs really struggle in the months to come.
That said, the gov't is standing by to try to help bailout CRE if necessary. So far it has not been necessary because of low interest rates. And they can't ask congress for another trillion dollars to bail them out. So they have to wait to really insure banks are stable before offering help in CRE. Therefore, before jumping "all-in" on SRS, always keep that in mind.
My suggestion is, wait until SRS crosses its 20 day moving average before jumping in much. Whether you hit the bottom at 17 or at 20 really won't matter much if SRS gets back to more historical levels of 75-120. Notice the chart above. Decay really is not as big of a factor with SRS. It is being impacted dramatically by low Q1 interest rates which are now gone. I suspect we will re-enter the 75-120 range by end of Q3 as 5.75% interest rates take effect.
SRS is not dead, it is just hibernating and interest rates may be the ticket for its return. The CRE market is totally irrational now but it has been hiding behind the low interest rates as its safe haven. It can't do that any longer and thus cash flows will be shrinking, and quickly once the **it hits the fan.
Beamer Dog ... do you understand how these 2X inverse ETF's work ? IYR would have to drop by 75% to 8, in a straight line, for SRS to go to 72.
ReplyDeleteUnlikely SRS will see anything higher than 30-40 ever again.
Its just math.
When these things Break, they are broken.
Just look at FAZ, FAS.
Hi Beamer Dog,
ReplyDeleteI was going to say what Coach just said. No one should assume that SRS will return to its previous high range of 72 to 120 (much less to its all time high range of 200 to 300). You have to do the math. If SRS bottoms at, say, 15, it would have to rise 100% to reach 30, 300% to reach 60, and 700% to reach 120. SRS rise 700% in the next six months? Very unlikely, unless a major catastrophe (like a terrorist attack) occurs. SRS may climb in Q3 and Q4 of 2009, but it may soar in 2010-2014, when CRE's problems climax (if it's not completely broken by then).
I tend to agree the likelihood of SRS getting back to its range is a little far-fetched given the current value. I am throwing out the 75-120 range as a point of interest as a typical historical value. And the point I was making is for the years before 2009, SRS really did not decay over a long term period while the market and REITs generally did well.
ReplyDeleteBut what is apparent is, SRS seems to be forming a solid bottom here and may be a good play for the next 3-6 months, yes long term for a core position anyway, because it appears SRS perhaps does not have the decay factor other leveraged ETFs have unless REITs double like they have the last few months
"Historical value" is completely irrelevant with 2x inverse ETF's. These are quirky, high-beta little derivatives whose value decreases over time.
ReplyDeleteCouple the downward force of the "decay syndrome" with an administration with a hard-on for saving anything directly downstream from the financial industry, and you've got a scenario which decreases the potential for any upside to SRS.
Barring a terrorist attack, SRS's days of parabolic volatility are over. We'll see a nice gradual trend to zero over the long term here.
The only way these defective pieces of paper will see their "historic values" is through multiple reverse splits.