Sequestration, Euro jitters, gold down: Futures up?
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WASHINGTON, February 22, 2013 – Body blows keep hitting this market, and for most of this week, they’ve taken their toll. The March 1 sequestration deadline is fast approaching for the Federal government with no solution in sight, as the Republicans, amazingly, seem to be standing firm while the President demagogues against them for backing a plan that he, himself put in motion. The dollar has been gaining strength, which, perversely, makes the market go down as our goods get more expensive on world markets; which also puts pressure on gold which has been looking more like a base metal to investors lately. The Philly Fed’s manufacturing numbers, reported this week, looked dismal. There are fresh worries about where the Euro will go. And Wal-Mart has been publicly nervous about its prospects, noting that the restoration of the full payroll tax in January has given consumers less to spend.
After a litany like this, it’s small wonder the market has been battered this week, with selling hitting a crescendo over the last two days and the VIX—a measure of market volatility—hitting highs we haven’t seen in months. So we’ll get more of the same when the market opens for its last trading day of the week, right? Wrong answer, apparently. As of this writing, half an hour before the close, Wall Street futures are pointing massively up. In fact, everything is looking good this morning, as everything except gold and precious metals—all of which reflects the dollar’s continuing current strength this morning at least.
It seems nuts. But so has much of 2013. Economic prospects really aren’t all that bullish. On the other hand, they aren’t really bearish either. That’s because nobody really knows what’s going to happen on or after March 1 because nobody really knows what the sequester will mean in the end.
The whole market is a little bit like the Aflac duck, currently on the mend and pictured artistically here and above in mid-recovery. Some stuff in the economy seems to be healing itself after an initial intervention. A return to normalcy may not be at hand, but we’re not exactly doomed tomorrow either, unless we failed to spot one of those rogue asteroids that have been hanging around our planet lately and threatening to cause some real, non-hockey stick global warming.
This morning’s market barometer:
We sold some of the stuff yesterday that we’ve been talking about, and likely will sell more today, at least into what appears to be the market’s imminent opening strength. REITs will be pared a bit, if only to take capital gains and then buy them back. We already dumped some of our fairly large holdings of Two Harbors (TWO), which currently yields an astonishing 17.7%. We may dump the rest today just because. But then we’ll likely get back in when the nonsense settles down, hopefully in time to collect the next dividend.
On the other hand, we’ll probably pick up more shares of the genuinely inexpensive Armour Residential REIT (ARR), a Florida-located, Maryland registered REIT that invests primarily in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage backed securities issued or guaranteed by a United States Government-sponsored entity (GSE) like Fannie, Freddie, and so forth. In dollar terms, the stock is cheap ($6.52 a share at yesterday’s close), and its yield is a whopping 14.72%. Extra-added bonus: Unlike most REITs, ARR’s dividend is paid out monthly at the current rate of 8 cents per share. You do the math. You’re not getting this return on your money market fund.
ARR got cheap earlier this month after it sprang one of the usual unpleasant surprises REIT owners often have to deal with: a seemingly out-of-the-blue snap secondary issue of stock at a discounted price. Such offers, often not available to the general public, obviously dilute the value of each share, and each share’s current value plummets as a result, generally the day before—and often days after—the new shares are issued. That said, the other side of the equation is the fact that the money raised by the snap secondaries is almost immediately deployed into more high-yielding investments, quickly putting to an end the dilutive effect as the actual size of the REIT’s portfolio grows.
REITs are a bit hard to value. PE ratios, currently quite low, aren’t much help. And often, the average REIT, particularly a new one, has negative earnings. Again, though, unlike normal stocks, REITs are usually evaluated by investors in terms of the net asset value of their holdings, not their PEs. Thus, net asset value and likely positive cash flow is what REIT investors look for and prize.
REITs are likely to continue to be good investments this year at least, with dividends either increasing from already incredibly high rates, or at least remaining level. At some point, when mortgage rates start going back up in a noticeable way, REITs will need to be re-evaluated, as their effective yields will start to decrease (due to the higher cost of money) as net asset values could also erode due to various factors. But right now, at least, the best of them are incredibly good values.
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