WASHINGTON, February 22, 2013 – The media has been going nuts about the impending Federal government budget “sequester” that seems a virtually certainty now on March 1. Congress has been off doing what it does best: taking a vacation.
Meanwhile, President Obama has gotten in his usual rounds of golf, punctuated by his patented attacks on Republicans for daring to question his royal prerogatives. Predictably, no progress whatsoever is being made on “the budget,” a mythical document that seems these days to be more extinct than the dodo.
Why are we paying these people anyway??
So the market is tanking this afternoon, right? Nope. Wrong answer. After two dismal, corrective days, the bulls are back at it this afternoon, and the market is up almost 100 Dow points.
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 bulls today have decided it means precisely nothing. More than likely we’ll find out on March 1. After all, to paraphrase Nancy Pelosi, we’ll have to get through the sequester in order to find out what’s in it.
Meanwhile, the President is using every chance he can get to blame the now inevitable sequester on the Republicans despite the fact that it was his idea to begin with. The usual suspects, from the knee-jerk socialists at Politico to the brain dead, blow-dried, leg-tingling TV automatons at Marxist house organ MSNBC are trying to give him an assist by blaming House Speaker John Boehner.
But for once, Boehner seems to be sticking to his guns, leaving the President, for a change, to twist slowly in the wind.
A new video, appearing below, seems to sum up the Republican current sequester position quite nicely. Meanwhile, we’ve attempted to portray the Democrats’ spin on the Obama vs. Boehner flap in our header graphic above. The President appears on the left. The Democrats’ artistic interpretation of Boehner appears, appropriately, to the right.
Updating this morning’s Market Maven market barometer
We sold off a few positions in our Market Maven portfolio yesterday, and are attempting to sell more today, as it’s best to lighten up positions in a rally rather than the other way around. We’re even paring some of our beloved REITs, 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’re holding off selling the rest given this brief market respite which appears to be occurring on low volume. We’ll likely get back into any REITs we’re selling when the current bipolar market settles down, hopefully in time to collect the next dividend.
On the other hand, today or Monday, 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.
Note: the Maven generally doesn’t get involved in the huge commercial REITs such as Vornado (VNO) or Simon Property Group (SPG). These are well-respected if somewhat risky companies. But in the game of yield, they’re no better than the average, decent dividend-paying Dow Jones industrial stock (yields between 2-4% generally), so you’re more dependent on the capital gain potential of these stocks which we don’t regard as very high at the moment. With REITs like the ones we’ve mentioned, you can collect your huge dividends right now.
Anyhow, let’s sit back and enjoy what will be at least initially a nice, surprise ride upward this morning in the market. After that, who knows. We continue to take profits, but continue to be tempted by well-run, high-dividend REITs and MLPs along with utilities, major oils, and refineries—although the latter have had an awfully good run lately and may be sell candidates if you already hold them.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Any positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any ar500ticle under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
Read more of Terry’s news and reviews at Curtain Up! in the Entertain Us neighborhood of the Washington Times Communities. For Terry’s investing and political insights, visit his Communities columns, The Prudent Man and Morning Market Maven, in Business.
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