Ben Bernanke Destroys REITs
Taper talk has caused a relative collapse in REITs. Is this an opportunity, or a monumental change in sentiment?
-- Pablo Picasso
One of the more underreported stories in the past several months has been the knock-on effects of taper talk on REITs (real estate investment trusts). The appeal of these investments relates primarily to the high yield they offer, as money flocks to such stocks when expectations for falling rates rise. They also provide a relatively liquid way of getting exposure to an illiquid asset class. As rates were falling, particularly on the longer duration side, REITs were bid up to valuation levels that were largely illogical. As of June 28, for example, the price-to-earnings ratio of the iShares US Real Estate ETF (NYSEARCA:IYR) was 43.11. Hardly a value play at that point.
More so than that, though, on a relative basis, they have gotten crushed. Take a look below at the price ratio of the iShares US Real Estate ETF relative to the SPDR S&P 500 ETF Trust (NYSERCA:SPY). As a reminder, a rising price ratio means the numerator/IYR is outperforming (up more/down less) the denominator/SPY. A falling ratio means the opposite.
Taper talk began in mid-May, causing a sharp relative decline and subsequent crash, with all outperformance over the last three years erased in a matter of months. Is this justified? Maybe; maybe not. I could easily argue that this was a long time coming given valuations... but by the same token, I maintain my belief that taper fears are way overdone, given persistent deflationary pressure in terms of the lack of demand-pull and cost-push inflation. A rebound can happen for a trade, but the cat is out of the bag. It takes time for such a massive collapse in relative performance to get undone.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.