A Look at Real Estate

I received a request (thanks, Cheri) to give my view of the (securitized) Real Estate market. While I include it as a part of my weekly sector analysis top down look at the markets, I typically look to other areas for investment of risk capital. It’s not because I dislike it or have a bias but rather because almost all my clients live in California and have more than their fair share of real estate holdings when considering their homes. As such, adding more real estate into their portfolios (even though it may be a bit different --- commercial REITs vs residential) I don’t feel comfortable over-weighting a portfolio unless everything is perfectly aligned.  We are risk managers first and foremost.

Below is a 5 year chart of IYR (with no dividends reinvested so we can get an idea of movement of price appreciation). In the middle pane, the green bars are the weekly price movement of IYR. Over the past 5 years, the price, without dividends, is up around 20%. In the lower pane is the ratio of IYR to the SP500 stock index. Because the ratio is falling that tells us that real estate (using IYR as a proxy) has under-performed the broader market stock index, SP500.  It may be hard to tell from the chart, but the amount of under-performance has been more than 20% over this 5 year look-back.  And to insure I am comparing apples to apples I have it set up such that this ratio DOES take into account dividends for both holdings.

Finally, you will see behind the green bars (IYR price) in the middle pane I have included another plot of the 10 year bond yield with a purple dashed line. You can see the almost perfect inverse correlation that exists between bond yields and real estate. The relationship tells us that as interest rates rise the price of IYR falls.  And vice versa. Intuitively, hopefully this inverse relationship makes sense.

With the potential for higher interest rates in our future a real probability, if that were to occur one would expect real estate to struggle. When combined with real estate’s ongoing struggle against other risk assets options (ie. non-real estate global stocks) and my client’s existing exposure, I still find no compelling reason to commit risk investment capital to this part of the market. If and when the economy slows down and interest rates begin to reverse course or the FED changes direction, I will be more than happy to change my mind but until then, there are much better opportunities available for your investment dollar.

Wheat "ease"

See how easy that was? Back on 6-19 I wrote about how the wheat chart was looking constructive and ripe for a reversal.  Seasonality be damned as the wheat speculators have been out in force driving the price up to my target and even higher, more than 20% in two short weeks.

Is this sustainable? Not likely but it doesn’t mean it’s done as the markets can stay irrational longer than you can imagine. I would love to see this pullback, create a higher low as it would then allow those that missed out another opportunity to enter as it looks like it wants to run for a while. Congratulations to those that took the trade but it’s time to heed one of our sacred investing rules of not letting a profit turn into a loss so consider taking profits and/or tightening up stops.

Good Morning, Vietnam

After peaking in mid-2014, the Vietnam stock market tracking ETF, VNM, went into a free-fall and declined more than 40%. It eventually bottomed in January of 2016. For the next 6 months it pushed higher climbing 20%, breaking above both the down trend resistance line and the 200 day moving average.  As with most bottoming patterns, the first push higher eventually runs out of gas and the sellers take control and retest the prior lows, which is exactly what occurred at the beginning of this year.

As you can see the chart has taken on a much more constructive look as price is once again above the (red) 200 day moving average which is now pointing up. In addition, RSI momentum is now in the bullish zone and, most importantly, price has broken above the prior highs. Hopefully the “W” bottoming pattern is easily recognizable because a confirmed breakout has a first target up around $18, almost 20% higher.

Its always important to keep in mind investing in small, emerging or frontier countries such as Vietnam equities is volatile and illiquid. As such, it adds greater risks than those you would normally experience in the more developed country markets. Some investors prefer to manage these risks by avoiding them completely.  Another solution, which is my preference as it allows you to diversify, is to ratchet down the size of your investment which in turn brings the risks down commensurately.

June 2017 Charts on the Move

With the first half in the books, where are we headed?

Let me know what you think. My current thoughts can be viewed in the video link below

https://youtu.be/jo5X7DBkJBE

The Smallest of the Small

The frontier markets are those countries/economies that are too small and unimportant to be considered even an emerging market. Their kind of like that weird sister you have but fail to mention when discussing your family to friends. Countries like Nigeria, Vietnam, Bahrain and even tiny Mauritius fall into the frontier market bucket. Investing in these markets is extremely difficult as access and liquidity (or lack thereof) are two major risks investors who stick to the “developed economies” don’t have to worry much about. 

Besides a limited number of mutual funds there are couple of ETF’s where investors can go to get exposure to the frontier markets, FRN is my favorite. As you can see in FRN’s chart below, it just recently broke out above an important, long-standing zone of resistance. Price is currently above a rising 200 day moving average, momentum is VERY overbought and in need of a rest and likely why price is currently in the process of back-testing the breakout zone. If it were to hold above it, the next upside target would be back at the prior $16 highs some 20% higher. And if the market really gets to rockin’ the prior 2011 highs could eventually be in view, an advance of almost 50%.

With any alternative investment we want to see its performance as compared to a benchmark before adding to a portfolio. In the second pane from the bottom is the ratio of FRN to the world stock index less US stocks while the bottom pane is the plot of FRN to the US SP500 index.  As you can see in both instances FRN has formed a rounded bottom and has formed a series of (slightly) higher highs and higher lows, an indication of a possible trend reversal.

Like the smallest of the small micro-cap stocks, investing in the frontier markets can be a wild ride but offers out-sized gains in addition to a lower correlation and beta to your typical stock index investment. As such, for those with a proper risk tolerance profile, the frontier markets should be considered for inclusion into a well-diversified portfolio.