REITs

REITs

Following Japanese Models?

Perhaps those sage English philosophers 'The Vapors' were on to something 32 years ago when they asked if we were "Turning Japanese" for it seems the following charts from Nomura certainly suggest the US bond market is heading in that direction. From demographics to monetary policy; from investor allocations to flows; and from bond bubbles and volatility to long-term interest-rate paths, it seems we share a lot more than a love for sushi and pachinko with our neigbours across the ocean as we seem to be chasing after many Japanese models (of asset allocation and macro-economics).

When ¥11 Trillion Is Not Enough: Japan's QE 9 Disappoints, Halflife Zero, Time For QE 10

It was only yesterday that we pointed out the ever decreasing halflives of central bank interventions. We are grateful that none other than the biggest intervention basket case of all came out and proved us 100% correct, when the BOJ announced none other than QE 9 just one month after the impact from QE 8 fizzled about 8 hours after it was disclosed. This time around, the destructive "benefit" to the JPY was negative from the first second, resulting in the first instance of monetary easing that.. wasn't. Japan just came up with a brand new New Normal concept: tightening through easing, when its ¥11 trillion intervention proved to be woefully insufficient for a market addicted to ever more liquidity injections.

Guest Post: The Latest Bubble?

Wall Street is doing some wild and wacky things. UBS has just launched a 16-times-leveraged MBS ETN. The ETN, called the ETRACS Monthly Pay 2x Leveraged Mortgage REIT, offers double the return of the Market Vectors Global Mortgage REITs Index – itself an investment vehicle 8x leveraged to mortgage-backed securities. The idea appears to be that with the Fed acting as a buyer-of-last-resort that prices will take a smooth upward trajectory and that 16:1 leverage makes sense for retail investors as a bet on a sure thing.

Latest Unintended Casuality Of QEtc.: Mortgage REITs

In the four weeks since Bernanke unveiled QEtc. and its focus on the MBS market, mortgage REITs have slumped - losing more than half the year's gains amid heavy volume. The selling pressure is warranted as these vehicles tend to be owned by investors seeking high-yield dividend plays - and as such any risk to that stream means high-beta selling. With re-investment opportunities miserly - thanks to Bernanke's ZIRP and spread repression - dividend-paying ability remains questionable. The business model of these entities relies on high asset yields, low liability costs, and access to leverage and the three major hot buttons we look at below do not look like improving anytime soon in a QEtc. world.

Overnight Sentiment Better On Yet More Easing

In a world in which markets are simply policy instruments of central planners it is no surprise that the only thing that matters is how much money is injected by any given central bank at any given time. Last night, following the Fed and the BOJ, it was the turn of Australia, which in a "surprise" move cut policy rates by 25 bps. From SocGen: "Reacting to a weaker global economic outlook, which has moderated the outlook for growth in Australia, the Reserve Bank of Australia cut its policy rate today by 25bp to 3.25%, a move that was predicted by only a minority of forecasters (including us). Nevertheless, we believe that markets are too aggressively priced for further rate reductions: we expect a low of 3.00%, to be reached by year-end, but the swap market is currently discounting a low of 2.4% by mid-2013. The reasons the RBA stated for lowering rates centered mostly on the global economic outlook, which has softened over recent months, not least because of greater uncertainty about near-term prospects in China, and hence the outlook for Australia is seen as a “little weaker”. The RBA also stated that the resource investment peak may be lower than previously thought." Sure enough, the move sent Australian stocks to 5 month highs, and global equity futures spiking. Of course, in the open-ended global race to debase perhaps it is more surprising i) they did not do this sooner and ii) not more banks have "cut" yet. Ironically, while the ECB, BOE and SNB are still contemplating next steps to catch up with Bernanke, it is the BOJ which in the abysmal failure of its own QE 8 from three weeks ago, is now contemplating QE 9 - the foreign bond edition (because buying treasury and corporate bonds, ETFs and REITs is never enough). Naturally, all this additional liquidity and promises thereof, has sent futures to fresh highs as more and more latent inflation is loaded up in the global monetary system.

New York's Ultraluxury Office Vacancy Rate Jumps To Two Year High As Financial Firms Brace For Impact

Traditionally, when it comes to reading behind the manipulated media's tea leaf rhetoric and timing major inflection points in the economy, the most accurate predictor are financial firms, whose sense of true economic upside (or downside) while never infallible, is still better than most. Yet unlike employment, which is usually a lagging, or at best concurrent indicator, one aspect that has always been a tried and true leading indicator, has been real estate demand, in this case rental contracts. Due to the long-term lock up nature of commercial real estate contracts, firms are far less eager to engage in rental transactions (and bidding wars) when they expect a worsening macroeconomic environment. Which is why news that office vacancy in Manhattan's Plaza district, the area between Sixth Avenue and the East River from 47th to 65th streets, anchored by the landmark Plaza Hotel at Fifth Avenue and Central Park South which is home to some of the nation’s most expensive and prestigious office towers, and where America's largest hedge funds and PE firms have their headquarters, has just risen to 12.3%, or a two year high, is probably the most troubling news for the economy and a real indicator of what to expect of the immediate future.

The Fed Now Owns 27% Of All Duration, Rising At Over 10% Per Year

When it comes to diving trends in the Fed's take over of the Treasury market, there are those who haven't got the faintest clue about what is going on, such as Paul Krugman, who naively looks (as Bernanke expects all economists to) at the simple total notional of securities held by the Fed and concludes that the Fed is not doing anything to adjust fixed income risk-preference, and then there are those who grasp that when it comes to defining risk exposure in the bond market, and therefore in equities, all that matters is duration, expressed in terms of ten-year equivalents. Sadly, this is a data set that not every CTRL-V major or Nobel prize winner (in order of insight) can grab from the St. Louis Fed - it is however available to those who know where to look. And as the chart below shows, even as the Fed's balance sheet has remained flat in notional terms, its Ten Year equivalent exposure has soared, rising by 50% during Operation Twist alone, from $900 billion to $1.313 trillion. What this means in practical terms, as Stone McCarthy summarizes, is that the Fed now owns 27.05% of the entire inventory in outstanding ten-year equivalents. This leaves less than 75% of the market in private hands.

The Experimental Economy

On the heels of last Thursday’s Fed announcement, there has been much commentary on the whys and wherefores of a new quantitative easing (the so-called QE3). Rather than re-hashing well-covered ground, I want to instead discuss the potential effects and unintended consequences of this policy and how it may impact the investment landscape going forward. Suffice it to say that the Fed had its reasons. QE3 evidences a belief in the so-called “wealth-effect” – the idea that one will spend more if he/she feels wealthier – and the Fed also believes it can contain any negative consequences. However, others would argue that it’s another shot across the bow of our foreign lenders that we are willing to engage full-out in a currency war as this policy clearly weakens the U.S. dollar. Because the Fed has embarked on a path with little historical precedent – where a central bank has signaled the intent to expand its balance sheet as much as it needs to – we are all now part of an experimental economy.

Bank Of Japan Increases Asset Purchases By Y10 Trillion, Total Program Now Y80 Trillion, Total Debt Still Y1 Quadrillion

It seems like only yesterday that we were lamenting "Einstein rolling over in his grave" as a result of the BOJ's latest increase in its asset purchase program from Y65 to Y70 trillion, although technically it was 5 months ago on April 27. We would excuse Einstein if he were doing cartwheels in his grave right about now, following the BOJ's latest attempt to keep doing what has definitvely failed for 30 years, hoping this time it will be different, as a result of the just announced latest expansion in the asset purchase program's size by yet another Y10 trillion, this time to a total of Y80 trillion. The expansion impacts only JGBs and T-Bills, both of which will be monetized by a further Y5 trillion. Putting this in perspective, Japan's total public debt is Y1 quadrillion, and counting very fast. All other components of the Japanese LSAP program, including CP, Corporate Bonds, ETFs and REITs (yes, unlike the Fed, the BOJ is quite open about its equity and corporate bond purchases) remain the same. Bottom line, just as we predicted back in July 2009, the global race to debase continues unabated, and as a result of QEternity will merely accelerate until the only true currency is gold tungsten.

Global Retaliation To QEternity Begin: BOJ Considers Additional Easing

Last week it was the Fed crossing the Rubicon with infinite easing. We explained very clearly that the next steps would be everyone else joining the infinite easing party. Sure enough, here comes the first one:

  • BOJ TO CONSIDER ADDITIONAL EASING: NIKKEI

Keep in mind that the BOJ already monetizes ETFs and REITs, the very instruments which the Fed will soon be forced to buy. And so it begins - because when it comes to pushing CTRL and P, over and over, it really doesn't take much skill.

Is 11% This Election's Most Important Number... And If Not, Why Isn't It?

With the US presidential election looming in just two months, there is hardly a state that is as critical to the outcome of who America’s next president will be, as Florida. As Bloomberg vividly summarizes, Florida - and specifically its five swing counties: Hillsborough, Orange, Pinellas, Seminole and Volusia - was the state that determined the president in all of the last 3 elections: set between the Republican-dominated North Florida and the more Democratic southern counties, these suburban communities of middle-class voters are known for their shifting allegiances. In 2008, Obama took four of the five counties to capture Florida. George W. Bush won three of the counties, and the state, in 2004. In 2000, Volusia’s vote count was disputed by Vice President Al Gore. Gore won the county yet lost Florida by 537 votes, giving Bush his first term as president. It is quite fitting then that these five counties are very much indicative of the primary malaise that has plagued the country for the past 4 years: the inability of the housing market to rebound no matter how many trillions in printed dollars are thrown at it. Which brings us to the key number that probably should (but most likely won’t in this age of ultra short-term attention spans and constant redirection and focus shifts): 11% - this is the foreclosure rate in these 5 critical counties, double what it was 4 years ago, and three times higher than the national foreclosure average rate of 3.4%. In other words, if there ever was a time and place when economics, through its sheer failure to restore “household wealth” in this most decisive region, was a key issue, now is the time.

Bernanke Discusses "Theoritcal Limit" To QE, Says Too Much "Would Hurt The Market"

Some rather unexpected rational insight out of Bernanke responding to Patrick McHenry's question on whether and how much more QE the Fed can do:

  • "I assume there is a theoretical limit on QE as the Fed can only buy TSYs and Agencies"
  • "If the Fed owned too much TSYs and Agencies it would hurt the market"

But in closing:

  • "We still have some capacity at this point."

Perhaps the market was expecting that the Fed would admit it can buy ETFs and REITs like the BOJ, or that it can sell vol into the single digits, as its New York Fed trading desk is rumored to be doing, but this is hardly the stamp of endorsement to buy any stock come hell or high water that the algos now expect out of the Fed.