Friday, June 5, 2009
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.
Thursday, June 4, 2009
I don't expect that trend to stop here. I think the VIX is primed to dip below the 28.80 mark perhaps as early as tomorrow since the VIX is typically week on Fridays especially in a market rally.
But, if the VIX can hold 28.80 and make another run at the 20 dma, I think it will finally cross it and perhaps signal the end of the 3 month bear market rally. But until that happens, I will not make a play anticipating it.
I continue to stay heavy on energy, china and gold. Also going to run with TBT as a long term play. I really really really want to short something but until the VIX gives a signal or until the SPX gives a signal with a convergence of its 20 and 50 dma, I will continue to stay out of general U.S. company equities.
Wednesday, June 3, 2009
And isn't it interesting to see the terrible numbers on mortgages and the media spins it as though, we really should have known this was coming so it should not be a surprise. Well, guess what, it is a surprise and it will be damaging to banks. Refi's are way down but so are approved mortgages on houses. Thus, we will see continued declines in home prices, more foreclosures and less new homes being built.
Green shoot my ass.
What I am seeing for so many indices, stocks, ETFs is that they appear to be on the verge of a technical reversal. The SPX has the 20 and 50 day MA's converging and the SPX itself, on any down move, will likely fall below the 20 dma and soon after the 50 dma. It may not happen in the next week or so, but it is close.
Look at SRS and SKF. All are tracking with the 20 dma and on any moves up, will cross and likely cause the 20 dma's to cross the 50 dma's.
Look at UNG. It is my current favorite because it has already crossed critical technical indicators. The price has crossed both the 20 and 50 dma's, and the 20 dma has crossed the 50 dma.
The VIX is just tracking below the 20 dma with the 50 not too far away. A cross the of the 20dma will be followed by the cross of the 50, yada yada yada...
And my other favorite is AXP. It is trying hard to break through its 20 dma and soon after the 50 dma, along with the same crossing of the 20 and 60 dma's.
Is this coincidence? Or are all of these on the verge of a reversal? Don't jump too soon because this trend could continue in a consolidation phase for awhile longer before the technicals show a clear breakout.
Tuesday, June 2, 2009
As you look at SPG's earnings reports and history, it is quite amazing how their FFO grows rather dramatically each quarter despite other REIT's struggling to stay in business. SPG's business model is not much different. They own similar properties, particularly malls and super-malls. They are exposed to the same toxic assets as the others. They have similar short and long term debt issues as the others.
Yet, their FFO grows while others fall. General Growth Properties (GGP) went bankrupt in April as it was obvious they could not keep up with upcoming debt maturities. there were no lines of credit available to them to refinance their debt. There was not enough equity to sell more shares to generate capital to pay off the debt.
For SPG, they were able to tap into more credit lines and also offer a secondary offering on the market due to the stock price so high based on FFO performance.
But is SPG really performing? Are they really generating higher rental income in the worst recession we have seen in our lifetime? Are they somehow able to reduce operation costs that much to offset lower rental income? Are their commercial properties really not losing value?
This goes against not only what experts are saying about commercial real estate, but also against the actions of SPG itself.
- They issued a secondary offering which diluted their shares by close to 20% in order to raise enough cash to pay off some due short term debt.
- They reduced their dividends from .90 to .60. But not only that, it is also no longer a cash dividend but a dividend in mostly stock but a little bit of cash, further diluting their shares by adding to the float.
- Yet despite these actions, they claim to have record FFO and earnings.
Why does a company have to dilute stock if they have record growth in earnings? It is because their debt far outweighs their capital. SPG will have to have blow out earnings for many quarters to come in order to manage the growing debt and reduced values of properties. To do this, they have to show they are reducing costs and growing revenues from rents. And you can't tell me they are increasing rent growth.
This smells very much like a cooking of the books. I suspect SPG, if they continue to show 10% growth in FFO each quarter, has to be a red flag to the SEC. I am not long or short SPG although I do trade SRS once in awhile but I think SPG is a stock to keep your eye on for a possible WorldCom type collapse in not so distant future.
The other issue with SPG is by reducing the dividend and moving it mostly to stock, it may create a bubble for SPG. As the stock goes up more investors may be diving in buying SPG wanting the stock dividend. This may be what we are seeing today. At the same time, insiders will be selling their shares to the company perhaps to payout the stock dividends. But in months to come, if SPG even falls 10% or more, it can create a spiral effect as investors heavy in SPG may opt out since their stock dividends are getting smaller and more risky. A stock like this will fall very quickly without regard to resistance levels.
So, from that, I think SRS and SKF could be good short term 10% plays today/tomorrow. But you can't play them longer term than that until the VIX does cross the 20 dma (yeah you are sick of me saying that but its just the way it is).
I took profits yesterday on UNG but plan a re-entry today. UNG may be technically breaking out and you really need to look at this ETF. It broke the 20 dma yesterday and the 20 dma broke the 50 dma late last week. Two very bullish indicators.
China and emerging markets continue to roll and if you missed it, you didn't miss it. These are good longer term plays that you have to have somewhere in your long term portfolio. The hell with the U.S. equities. They will underperform emerging markets and especially China.
I think Gold is due for a pullback here but not a big one. Perhaps fill a gap to 940 but for those playing GLL expecting a collapse in Gold, you are swimming upstream.
Bad data will come out today in the form of housing data and auto data. The question isn't whether the data is bad. The question is, how bad and how will the media spin it and how will market react. I will buy SRS at the open and watch for SRS to spike after 10am and if it does, it would be a good selling point or a point to hedge with puts or covered calls.
Monday, June 1, 2009
Don't read too much into the VIX moving up on a Monday when the market is moving up. The VIX is just showing that there is instability in the market making such a quick move and will probably have some sort of correction soon. The problem is, that correction could be small.
I do agree that longs should sell into this strength and the VIX is indicating this. But it does not mean it is time to short stocks or take a full bear stance. As I have been pounding and pounding, DO NOT take a big short stance until the VIX crosses the 20 dma. I can't stress this enough and so many people have been going all in on the short side expecting the market has topped. It is fine to play some on the short side and I have been all along but until the VIX gives a clear indicator that the sentiment has changed, you just can't over extend.
2 key indicators that the market is going to take a lot of the gains back...
1. The VIX passes the 20 dma for 2 days straight
2. the SPX 20 dma passes the 50 dma on the negative side.
Those two are sure TA signs that the market sentiment has changed. Until then, you have to sell into rallies and buy on dips.
For me, I am selling the small long positions I have as I write and also buying SDS looking for a 10% gain and then exit.
But the VIX remains solidly below it's 20 dma which would indicate the market is still not ready for a real correction.
So, we stay in a trading market where longs have to take profits on moves up and shorts have to take profits on moves down and I will continue to do this until the VIX breaks its 20 dma.
I have really moved mostly out of the U.S. equities and focused on energy, nat. gas, gold, china, and emerging markets. I exited my TBT positions early last week and looking to re-enter those this week at 52 or even lower.
Financials continue to be way to volatile and a completely unknown commodity. Some experts say the banks will have record earnings, others say the toxic assets (that no one is talking about) will eat them from within.
Long term, the market will have a huge correction and I still believe it will be this summer, starting in June. Unless you believe markets go straight up with unemployment at record levels, you can't bet on the markets continuing their march.