Even with the downturn in the residential housing market, and credit issues that continue to make front page news, as of the end of September REITs have generated total returns including dividends of about 1.8 percent year-to-date (see Investment News article). During the same time the S&P 500 was down 19.3 percent, the Nasdaq was down 21.1 percent, and the DJIA was down 18.2 percent.The REITs that are outperforming include the self-storage REITs, which are up 33.8%, health care REITs, which have risen 18.5 percent, and apartment REITs, which are up 17.4 percent. Not surprisingly, the worst-performing REITs are those tied to mortgages, with returns down 31 percent. Other poor performers include the lodging REITs, down 26.7 percent, and the industrial REITs, down 25.4 percent. The wide range in returns continues to illustrate that not all REITs are created equal, in part due to their varying levels of exposure to the current credit issues that are gripping the market.

In fact, if you still find the US market a little too uncertain, looking outside the US may prove beneficial. The Canadian real estate market appears to not have the same level of exposure to the recent US housing-related problems due to their real estate market having a more stringent regulatory structure (see article). Unfortunately, many of the REITs in this market have already had a nice run after being oversold last year, and may provide less current opportunity (see past Trader's Narrative blog post for a listing of Canadian REITs). On the other side of the globe, Northern Trust has recently launched a new Japanese REIT, although it is also not clear if the timing is right given possible credit exposure in the Japanese markets, along with the low liquidity and volatility of the product (articles here and here). Nonetheless, many Japanese REITs do have exposure to commercial real estate, as opposed to residential real estate, making them currently more attractive. Analysts are also speculating that the market has finally reached rock bottom in Japan and is therefore due for a correction, although many have been making this call for a while now.

 

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My family asked that, while on a 4-day break, I refrain from posts to the ETF Expert blog. We all needed a weekend of quality time. Little did I know that 9/29/2008 would register a "777" on the Richter Magnitude Scale for stock market damage. "The House didn't pass the rescue package?" You may have noticed that oil prices and exchange traded funds (ETFs) have been a tad volatile lately. On Monday, we witnessed one of the most volatile days for the commodity ever, where prices rose 15.7%. Trading was actually suspended once the $10 trading daily limit was reached, before resuming a few seconds later after a new limit was set. HERE’S THE TAB All eyes were glued on senate testimony today which should have featured an optimistic Turnaround Tuesday. But, no, as such it was a flop despite some intraday attempts to rally. The only thing that reversed course today was profit-taking in gold and oil. What’s the problem? No one can get their hands around the bailout deal or its ramifications. If there's ever been an entire year where 100-point-plus moves on the Dow became commonplace, I don't remember it. Even during Nasdaq euphoria (1999) and dot-com heartbreak (2000), the daily volatility was not as jaw-dropping as 2008. Yeah, I’m thinkin’ Big Wednesday once again and thanking family friend Chris Spezzano for the image. When I was young I used to…nevermind. Blogging this market everyday shortly after the close seems useless since the news cycle is moving faster than prices. I’m just gonna say this is as volatile a week as we and most others predicted, and it’s not over. You might have noticed the markets have been a little bit volatile lately - there have been swings in the hundreds of points either way on any given day. Perhaps you think it's just been bad all over. They say hindsight is 20/20. Yet a chart of the the CBOE Volatility Index (VIX) offers rear-view mirror, night hawk vision. I've talked about buying opportunities using the VIX in previous posts. You may want to brush up on your understanding of stock market volatility by reviewing my earlier commentary. Earlier today on The Network they had a chap on (whom I seem to recall his being wrong a lot during this bear market) who suggested getting out of or reducing foreign equity exposure due in part to the recent rally in the dollar. Presumably he thinks this trend will continue. The call may or may not be right but it raises several dilemmas for investors. The issues include commission dollars spent, taxes (depending on the account type), where to invest the proceeds and the risk that the dollar rally is a short term snapback in a downtrend.

Obama lays out tax increase to pay for more government. Capital gains and dividend taxes would go to 20% versus the 15% they are currently. That means an extra 5% of your hard earned gains on your money goes to the government. To put it in simple terms if you worked hard to accumulate money for retirement and earn $50,000 in capital gains on your money, you get to send in an extra $2,500 according to this plan. I understand there is more to his plan, but this was enough to send me down the street yelling. Why? I have read the rationale of tax the rich. But let’s face it the rich are already paying all the taxes. Between high income earners and corporations 92% of all the taxes are collected. How about cutting government? That would be a unique twist on things. Don’t get me stated on the proposal to hike social security taxes.

Okay let’s look at some sectors so we can earn enough money to help Obama out. One place I would like to revisit since our last conversation, the dollar. At last look the greenback was breaking above the 77 mark on the dollar index (DXY). After consolidating between March and July the breakout is significant in many ways at this point both economically and investment related. The long consolidation period is important to the upside and as we see looking at a daily chart the rise has been quick. In browsing comments by analyst and others the common belief is the dollar will not hold the gains and this is a reaction to the slowing economies in Europe. I agree with that to some degree, but there is still the fact the Fed has not hiked rates. I could see some resistance at the 77.76 mark short term and then a potential move towards the 82 mark. You can play the dollar through ETFs such as UUP which is PowerShares Dollar ETF. Short term look for a pullback on the rise to maybe the 10 day moving average and then a potential move higher from there. Watch economic data releases as they will have a potential impact to the index. Other ways to play this move would be to short the euro, yen, pound, etc. against the dollar move. This can be done through ETFs as well. Borrowing the shares could be a challenge with some clearing and brokerage firms.

The energy complex continues to struggle as the price of crude drops. I have discussed this in several pieces so today I wanted to take a detour to one of the alternative energy ETFs. FAN which is the First Trust Global Wind Energy ETF launched in mid June has fallen from $31 to $25. The 19% decline has been in related to the decline in crude and the energy sector overall. So why bring up this bad news? Simply because the outlook for demand on wind energy has not declined and this is something worth putting on a watch list somewhere. Yesterday Vestas Wind Systems (VWDRY), a wind turbine manufacturer, announced strong second quarter net profit. They stated they have a backlog of orders for the balance of 2008. The reaction from investors to the decline in crude prices has been to exit the sector along with anything related. This brings opportunity and this is one I will be watching.

Scanning through the country specific ETFs the last week isn’t a pretty picture. This is evidence of the news concerning the declining growth in Europe. Asia is showing signs of slowing as well. Hong Kong announced 2nd quarter GDP growth at 4.2% versus the expected 5.3%. This as I referenced above is helping the dollar move higher. It is also pushing gold lower. Overnight gold fell to $785. The metals continue to come under selling pressure and if you are still invested here you need to revisit your objectives and the use of stops. This could get worse if the dollar bandwagon riders proceed with the parade for a stronger dollar. On the other hand, this could be an opportunity if gold gets oversold short term. Either way I am waiting this one out on the sidelines.