recap of a continuing conversation in which i have yet to truly engage with, amongst the investment committee members of three including me - i am making up my mind ;0)
From: W
Sent: Fri, April 22, 2011 3:24:05 AM
Subject: strategy
Reit are not a bad idea as compared to cash alterntive.
Reit’s steady px action and as inflation hedge looks better than tips on swb perspective (low volatile, trending mkt)
I had closely followed reits given my 5 yr mortgage back ground back in nyc.
vanguard reit index - vnq (this is FAR away the best reit etf as compared to rwr, icf and wrei. vnq beats on aum, annual expense is 66% lower than icf and half of rwr; aum is 15-20x bigger than the others; daily volume is 3x; has option; yield is the best betw 13 to 40% higher than others)
wilshire reit - rwr
cohen & steers realty majors - icf
wilshire us reit - wrei **the absolute worst reit etf
intl reit index - rwx
china real estate - tao (as of 6/10 holdings are 72% hk, 27% china, 1% sing)
to do:
agree that nly and cim will definitely get hit if fed raises rates, but I would use that as buying oppty
we can build up a core position around vnq.. atm vol is not bad at 17% similar to spy yetthere is much more capital appreciation upside. Yes, I think I will build up a position here. Vnq is 3.3% yld vs 1.76% for spy; vnq high in 2007 before was 90 and its trading at 60 now;
From: P
Sent: Thursday, April 21, 2011 11:52 AM
Subject: strategy
Guys,
I am still nervous about a possible sell off in UST and mortgages that the FED will sell to reduce balance sheet. I believe that would affect NLY mark to market on their mortgage bond holdings. (unless you can find out if their avg duration is less than 2 yrs)
Alternatively, instead of NLY we could invest in large reits of actual buildings (not mortgage paper). These REITS should still be able to take advantage of the low short term rates and won't be affected by long rate rises while still taking advantage of whatever inflation arises which will raise their rents (and conversely their local costs)
Here are some candidates:
PDMPiedmont Office Realty...19.73-0.01-0.05%3.41
BSLGSL Green Realty Corp.78.80+1.361.76%6.21
BCLIMack-Cali Realty Corp.34.79+0.170.49%3.02
BPKYParkway Properties, Inc.17.27+0.130.76%378.85
MDEIDouglas Emmett, Inc.19.96+0.160.81%2.48
BKRCKilroy Realty Corporation40.50+0.501.25%2.33
BVNOVornado Realty Trust92.09+0.680.74%16.92
BBDNBrandywine Realty Trust12.21+0.010.08%1.67
BBXPBoston Properties, Inc.98.76+0.640.65%14.32
BGOVGovernment Properties ...26.63-0.05-0.19%1.08
BLRYLiberty Property Trust34.89+0.020.06%3.99B
I currently follow PDM (which has hovered between 18-20 with a quarterly $0.32 div ~ 6.4%) and I live in a DEI property (well managed with a very strong attention to cost and liability management while keeping everyone there due to location location location-they buy the best in Hawaii and California--both residential and office)
Once we are thru any FED induced sell off in mort/govts then we can add to NLY.
regards,
P
On Apr 20, 2011, at 1:30 PM, W:
P, thks for putting in the research effort on hussman and your comments.
On the strength of your recommendation, I read hussman 2x and slept on it before responding:
Hussman:
the new news for me was how slow fed can raise rates because of the large monetary base post qe2. before the unconventional qe2, we never had to deal with this drag on raising rates.
disagree that there can be any exogenous event which can influence short term rates. 3mth tbills will be dictated by fed funds. Disagree that fed has to worry about any 50:1 leverage ratio or any loss to balance sheet. It’s truly accounting games.
W’s view of the world
what is the best hedge against inflation? Tips or gold or silver? Tips is actually not a bad instrument as I checked it out further and it gets adjusted for headline inflation, not core inflation. BUT tips as we know is a hedge against usa inflation, not global inflation such as gold. There is neg real rates in usa , china and japan. The 3 largest gdp. That’s good enough for me to think that gold rallies until rates go up meaningfully.
any drag on raising rates because of the large monetary base according to hussman means current steep yield curve will stay steep for longer.. so nly is the curve steepening play.
This week was probably my personal best trading week against adversity. So I began the past week’s ic call by saying that I felt better about the portf than would be indicated by the mtd on Monday at -.50%; today, we’re at +1.1% mtd because on Monday, we
1) bot gold, gdx and silver on the dip
2) bot xle and xlb as an outperformance for spy
3) bot audjpy
4) I wasn’t shaken out of the large incr of risk units from 2.3 to 3.0 as I had in the past because I was highly convicted in our lterm trends and swb showed that after the 1st hour of selling by huge volume, the rest of the day rallied right into the close with steady volume. This gave me conviction. Then swb showed support. On tues, swb showed breakout of support and I held the position further.
5) Mon was an oppty to buy on the dips which we have all agreed are lterm trends on the above mon purchases
Today, what to do now?
I converted some outright longs in gld, gdx and silver to selling puts; the volume on silver even tho its gone vertical is further reaffirmed by the px action. Since the $40 to 45 move in past 5 days, the avg volume has also incr by almost 2x. wow.
tbt finally found a base here according to swb and I added to our single biggest postn: .7R on tbt; this is double my natural steady state of .30R on any single position
mon risk units were 3.0R. today its 2.5R
the key debate for our IC team is not to debate our views which we all agree but what should our portfolio look like in terms of position size. How much in slv, gld, gdx, tips, as a core position which is not to be touched!!!!! What is to be traded around because there will be increased volatility as we head toward end of qe2.
From: P
Sent: Tuesday, April 19, 2011 5:52 PM
Subject: strategy
Then the curve stays just where it is --and we make money the same way as the banks --borrow short term money and invest it in longer term assets.
1) buy UST and then repo them out: wen will be scared
2) Buy PFN and let them do the work
3) buy equities of all good banks -- jp morgan type not BofA type
4) S&L's
On Apr 19, 2011, at 5:46 PM, J wrote:
what if #1 is the truth but #2 is the popular spin that all believe in?
From: P
Sent: Wed, April 20, 2011 8:43:22 AM
Subject: strategy
GUYS,
As noted in yesterday's meeting- I believe it is critical to understand the fixed income situation and thereby derive expected equity, commodity, fx outcomes.
To that end, please read this long article twice! Seriously ...
hussman.net
This gives a very good understanding of what choices the Fed has given itself and several yardsticks we can follow and measure.
Barring an exogenous shock: four potential outcomes
1) bad economy ? Fed starts QE3 ? 1-4 bp 3 month Tbill yields ? stable to no inflation
2) okay economy ? no QE3 ? any market driven rise in short term rates has to be scrubbed essentially by huge sell off of balance sheet or else ? big rise in inflation
3) heating up economy ? no QE3 ? Fed raises rates by 25 bp ? has to be scrubbed by a sell off of over $600 billion in USTmort (since front loaded effect) ? every rise of 25 bps in later stages would still require a sell off of over $125 billion in UST/mort? so Fed keeps raising rates and selling securiites to reduce monetary base.
4) okay or heating up economy ? no QE3 ? Mkt or Fed raises rates by as little as 25 bp in short end? no FED sell off of securities ? would lead to a 40% rise in CPI
Important note: as FED raises rates it wipes out its capital and since it is currently levered 50 to 1 that is a problem. It will have to live off the spread just like other banks so it too will need a steep curve to survive.
So I doubt that #1 or #4 will happen? so # 2or #3 means that the FED can only raise rates by a very small amount (max 25-50bps this whole round) because they cannot afford to either wipe out their capital nor can they dump $ 1.4 trillion of govt debt (out of a total $ 2.5 trillion monetary base currently) back on the market in short order to stifle the inflation effect. So probably they will raise rates 25 bp and sell back too little debt ? raising inflation quickly. Quite oddly: raising rates without sterlizing the effect by quickly selling down the balance sheet will lead to high inflation. If they don't raise rates at all, then you can be sure they will be trying to carefully sell off alot of UST to reduce their balance sheet and get out of this precarious situation. This will have a negative effect on bond prices and I expect the curve to steepen alot. So long rates up alot and short rates stay very close to here.
Conclusion:
1) tips and gold now;
2) find a curve steepening trade to put on --expect the intermediate and long end to back up alot
3)invest in nly and cim only on the expected pullback due to either the first rate hike or the Feds need to sell UST and CMO's back into the market (careful here it could hit mortgage prices hard)
4) what else : perhaps high yielding reits such as PDM after the backup in mort prices and any short end rates
5) your other ideas gentlemen?
P
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