10/23/09 Laguna Beach, California – The S&P 500 Index jumped more than 1% yesterday – lifting the index to within a whisker of a new one-year high. So let’s have a moment of silence, please, for the millions of S&P Index put options that have died in vain… Thank you.
As it turns out, not every sort of put option is perishing on the financial battlefield. A handful of very conspicuous stocks and indices are refusing to join the S&P on its march toward new highs. Most financial stocks have slumped about 5% from the highs they hit on October 14. Citigroup and Bank of America are both down more than 10% since then. Likewise, the Dow Jones US REIT Index has been slipping over the last few trading sessions, even though the S&P has been inching higher.
Is this divergence just a temporary “stock market thing,” or does this divergence reflect a very real “Main Street thing.” Dan Amoss, editor of the Strategic Short Report, believes it is the latter…and he said as much in yesterday’s 5-Minute Forecast…
“The upcoming third-quarter earnings reports from real estate investment trusts will not be pretty,” writes Dan Amoss, whose Strategic Short Report readers are currently betting against the REIT rebound. “Second-quarter earnings for the sector were boosted by one-time gains from buying back publicly traded bonds at discounts, and taking advantage of bond investors’ newly whimsical attitude toward credit risk by floating new bond issues. Earnings were also boosted as REIT executives slashed property operating and maintenance expenses. But that can only go so far before real estate quality becomes an issue. The competitive environment to fill vacant space will squeeze REIT profits. If you’re a high-quality tenant, it will be a ‘buyers’ market’ for years…
“The Dow Jones US Real Estate Index has tacked on a hefty 30% rally since second-quarter earnings season in July. REITs are now priced for perfection, rather than being priced for the obvious multiyear depression staring REIT owners in the face.”
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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