Anxiously Awaiting the Last Nail in the Coffin

It has been a rather rough ride the last 5-6 market days as investors finally figured out that interest rates will be raised by 1/4% next Wednesday when the FOMC meeting ends.  The hike isn’t our big  concern it is what Chair Yellen will say after the rate hike is announced.

On February 16th I wrote the article “The Coming Interest Rate Hike” .  This was right after Fed Chair Yellen testified to congress and honestly she waffled back and forth, just as she had tended to do almost everytime she opens her mouth.  We said in that article if we waited for each and every data point in the economy to come in “hot” we just as well admit that ZIRP (zero interest rate policy) is here forever.  At the time we wrote this article the CME Fed Tool was giving a 17% chance of an interest rate hike in March—17%!!!  We noted that either a) there would be no fed funds rate hike in March or b) there would be a lot of blood spilt in the next couple of weeks.  On  February 27th we wrote an article “Will Markets be Blindsided with an Interest Rate Hike”.  It is really seldom that we would write 2 interest rate articles in 2 weeks–in fact we are pretty certain that has never happened before.  This 2nd article was motivated by what we thought was a very complacent attitude by investors.  The CME Fed Tool had moved up the odds of a interest rate hike to 33% meaning that Fed Funds traders were still very much betting against an interest rate hike.  We had noted that it would be fun to watch investors as the interest rate scenario played out.

Well we have our answer to the speculation noted above as preferreds, baby bonds and in particular REITs have been slapped down pretty hard this week as investors came out of their self induced stupor to figure out rates are heading higher.   Preferreds and baby bonds have on average lost 1.5% this week, while REITs have been knocked down by a staggering 4%.  If you are holding a potful of perpetual preferreds you have had some pain which is exactly the way these things work–NO surprise here.  We have had about a 1% knock to our personal holdings, but we hold a higher percentage of shorter maturity instruments than many, but we took the largest knocks to positions in Independence Realty Trust (NYSE:IRT) and Whitestone REIT (NYSE:WSR)–in fact the hits were large enough to make us lick our chops pondering further purchases.

So tomorrow we get the employment situation report and consensus is for the addition of 200,000 jobs with a drop in the unemployment rate to 4.7%.  Earlier this week the ADP employment report showed a massive job growth of 298,000 jobs against a consensus of 183,000.  If we get this kind of blowout number tomorrow the talk will not be a 1/4% interest rate hike in the summer but of a 1/2% hike and it is this talk that could cause further problems for income investors.

It is too late to shift your investments now to shelter your holdings from further net asset value erosion—and we may have seen the worst of the erosion already so you just as well sit back and study market movements for your own education.  We will not be buying tomorrow, but we will watch IRT and WSR to see if they are worthy buys next week.  We would avoid most Retail and Mall REITs as there appears to be a potential fundamental change happening in the marketplace with store closures.  Whitestone REIT is a retail REIT, but totally different than say a Realty Income (NYSE:O) in that their tenants are small law offices, accountants, and small mom and pop local businesses so we are not deterred from owning them right now.