Recapping The Wild Market Week

The week saw the Dow Jones Industrial Average trade in a range of 700 point with highs around 17,900 (just 150 points below a record high) and lows around 17,200. It was not the high or low that was interesting, but more the daily movements. Tuesday the Dow opened up by over 200 points before turning and heading lower – a dramatic 350 point swing. It is obvious that there is big money moving these markets around in a fashion that scares us only because these things can get out of hand and end up in a crash of sorts. The week ended with a sharp rise, but in the end the DJIA ended off just 240 points for the week–about 1 1/2%.  We will warn once again–these markets are likely in for a big fall over the weeks ahead.

Looking over the various income areas we watch we are kind of amazed that the REITs just keep marching higher–although by now it is becoming clearer that the commercial space is overheating and we have seen property changing hands in New York City at cap rates of 1-2%. Who buys property with a current cap rate of 1-2% expecting to either raise rents by 100% or expecting values to skyrocket even further? Only a damn fool caught up in the manic of the moment. That is what free money will do to markets-but the piper will be paid down the line. If one will remember 18 months ago REITs overheated and then when the taper tantrumcame they retreated by 20-40%. While it won’t be the threat of higher interest rates this time it will be a drastic slowing of business conditions that finally wake up the REIT investor to the fact that values can grow to the sky, but at some point someone will yell ‘fire’ and eveyone will bail out. We hold numerous REITs in the models which we will begin to thin out this coming week. In our personal account we hold mainly apartment REITs-Independant Realty Trust (ticker:IRT) and Bluerock Residential Growth REIT (ticker:BRG) and we will continue to hold these shares in all accounts.

MLP’s continue to be the dogs of all income investments as well as being the most dangerous. While the more ‘seasoned’ issues continue to hold up quite well they do not pay distributions that are very high and we believe that even these issues do not provide the risk/reward necessary for us to consider holding them.  We most closely watch the upstream companies such as LinnCo, Breitburn, Mid-Con, Legacy Reserves etc. and while they did have 1 day of up prices this are dead money (at best) and we expect all of them to eliminate their distributions by year end–barring some black swan event in the oil markets. After they go through redeterminations (usually twice a year) and are required to write down reserves that are not economically recoverable we will find out who is a contender and who is a pretender. This is the important part that is not being talked about. All of these clowns are giving presentations on their hedges etc, but none of them are talking about what happens to their credit availability when the value of oil in the ground evaporates. This is what we are watching closely as it has the potential to send some of the upstreams to the bankruptcy heap (or to a fire sale). Unfortuately you have to dig deep to find out the answers to these questions–but we will be watching continually. While an investor might pick up a couple dollars on a quick flip of their preferred issues it would not surprise us that before the year is out some of these MLP’s will suspend payments. If you are buying these preferreds you should consider yourself a speculative and not a conservative income investor.

With interest rates falling you might expect preferreds to continue higher–but as a group they are treading water. Investment grade issues are outperforming the junk issues and with the tepid global economy we would expect this to continue. CHS did launch their new 7.50% preferred issue (Temp ticker:CHNPP) this week and it didn’t disappoint with good demand it ended the week at $25.52. We picked up some in the models (which we can’t enter on the spreadsheets yet as the quotes aren’t in the ‘system’ yet) as well as a chunk in personal accounts. Our thoughts now is that one should only be buying the quality or the shorter maturity Term Preferreds. Exchange traded debt issues are moving higher by a tiny amount as many of these issues are investment grade and with falling interest rates they are seeing some demand.

Our Canadian issues do just fine. For some reason we can’t force ourselves to watch them as closely as we should. We do watch Leisureworld Senior Care (ticker:LWSCF on the pink sheets in the U.S) as we think this is an excellently run company and we expect they will raise their distribution in the near future. We own this issue in our personal accounts as well as in the models. The dividend isn’t huge, but there may be capital gains potential.

So buckle up. Next week is bound to be a wild ride once again.