Wednesday, July 29, 2009

To REIT or Not To REIT

Top Line: The stock market continues to cling to the high prices. With a possible burst up to fresh highs, the market would be free to go back down. Or, it could just go down from here.

The past few days have seen the SP500 trade in a very tight 15 point range, about 967 to 982. This type of action sometimes leads to a pop and then a good sized drop should follow. If not, the market is ready to drop about 10% over the next month or so.

Yes, we know we missed the rally over the past couple of weeks because we didn't heed our own advice, but the current message is fairly clear...down move ahead. The bullishness in the media is too strong to think anything else, in our contrarian opinion.

GDX continues to go down signalling a drop for the market. The volatility indexes are refusing to go down anymore. The dollar is close to a low and Treasury bonds are holding or even getting stronger.

The Treasury auctions of the past couple of days did not go as well as they thought Monday's auction went but still the long bond is stronger. The Treasury is trying to sell a mountain of debt this week and still the long bond holds its price.

We had a question in an email today that related to a 7-9 year time horizon and what we think would be a good investment for this period. Please understand that the best advice we can offer at the moment, or at any time really, is to buy value and sell strength. Over the next 7-9 years, or 10 years as we expect, the market will be in a roller coaster ride with the ultimate lows to be registered in the 7-9 year period probably with a higher low in about 10 years.

In this environment, we think that buy and hold is a poor strategy no matter who the buyer is. The next 10 years will present several opportunities to make very high percentage moves such as have been made in the past year or two. Buy and hold will come back as soon as the media and your friends start telling you they will never put another dollar into the market again. That should happen after they've lost a lot of money and be in about 2019.

For now, if you think a particular stock looks good, because it is cheap and it has the potential to run up a long ways, then by all means buy it. We don't see many stocks like that now because we think the market is going down for the next few weeks.

The stock that was mentioned was a real estate investment trust (REIT) which as you might imagine invests in real estate. Our particular position is that real estate is to be avoided in this market but we do Not follow REIT's, although we've heard of the one mentioned. In this case the dividend is near 15% which seems too good to be true. Like we said, we don't follow these vehicles and can not give you good advice on them.

What we can do is to advise you to be nimble with those funds. Assume that the T-bonds will perform in the opposite direction as stocks and trade back and forth between the two investments as conditions warrant. Or, come back here and we'll try to nail down the timing for you...or maybe we'll just try do that and you can take or leave our advice. Right now, we're headed down in our opinion so holding TLT may be an ok idea for about a month. Then we might switch to GDX or some other commodity for the wild ride we expect from August to October or November.


Anonymous said...

Looks like we got our spike this morning. I'm taking the opportunity to sell some of my stocks into the strength.

Looking for a pullback of about 10% from here. SP500 is currently near 1000 so I expect about 900 over the coming month.

Happy Trading to you and we'll post on Sunday evening...summer schedule and all.



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I love reits as an inflation hedge.

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