REITS - Buying 1 - 2 weeks before going ex-dividend Message Board

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Strategies & Market Trends : REITS - Buying 1 - 2 weeks before going ex-dividend

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To: Richard Barron who wrote (2484)	12/9/2003 12:06:59 PM
From: gregor	Read Replies (1) of 2561

Dear Richard. I read a recent article in Business Week that stated something that goes against all that a rational person would think. The premise begins with productivity rates that are acceleratiing. I know in the past quarter that productivity increased over 9% in the last quarter over the year before quarter. My first observation is that the 9% number is higher than I can ever remember, and that is not saying that my memory is perfect by a longshot. My rational mind thinks that with productivity increasing by that amount that there will be a lot of goods available at lower prices thus keeping pricing power very low. I know that raw materials have been increasing in price but I know that in general labor is more of a cost component than raw materials so 9% would have to outpace labor and raw materials. You would have to conclude that this much of an increase in productivity would have to have a lowering effect on interest rates since there would have to be less of a demand for capital goods since manufacturers would have to be bringing more goods to the markets at lower prices...or so I thought...but this is what really happens according to the article. When there is this much of an increase in productivity it always signals the earlier stages of a strong recovery. Business and manufacturing will wait until the last moments to hire new workers and will be working existing workers to the bone and until over time is kicking in. The result is an increase in productivity. Not only that but higher cost producers will notice that competitors will be producing lower and lower cost goods and they will come to the conclusion that the only way that they will be able to stay competitive is for them to reinvest in new equipment to lower thier costs of production and to increase their productivity to the levels of the competition. This last minute rush on capital goods is what eventually will bring on the increase in interest rates through loan demand. The conclusion that the writer made was that the 10 year bond will hit 7.5% in the current cycle up significanlty from the present 4.3% level. When asked what level of inflation this would translate into the writer stated that he saw no more than 2.5% inflation. This floored me since one would assume that the ten year bond would trade at no more than three points over the level of inflation which would translate to 5.5%. The conclusion reached was the level of equilibruim the level of interest rates would need to reach balances loan demand and the level of supply. You have previously stated that higher interest rates accompanied with higher inflation is not necessarily negative for reits since higher inflation would give reits the pricing power to raise rents. Richard. If this writer is correct in his assumption that inflation will only reach 2.5% and the long bond or the ten year would reach 7.5% then I can only see very negative implications for this sector. 2.5% inflation is not very high in my opinion and will not leave much room to raise rents. Today there is talk of demand already slowing down and some sectors already cutting dividends. If so what will follow? I for one do not feel the outlook is very good. We are already reinvesting our dividends in other areas and selling off some of our holdings.....what do you think and comments. Gregor

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