Trader’s Narrative

There are very few moments in market history when absolutely everything is being sold: stocks, bonds, commodities, REITs, etc. We are going through one of these rare times right now and it can be gut wrenching. Forced liquidation in a bear market can be so brutal, it makes surviving to be able to take advantage of the next bull market a challenging goal.

One of the bastions of stability and what I considered one of the safest investments around, Canadian REITs, have now seen such forceful selling, they look as if they are toxic assets. Take a look at how it left behind the downward trend line and simply dropped off a cliff:

You have to remember these are shopping malls, offices, apartment buildings, manufacturing facilities and warehouses. Basic real estate that is being used day in and day out. And it is being paid for by long term tenants. Sure, there is softening in the Canadian real estate market but it won’t impair what really matters, the income potential of the assets.

In fact, going back I can’t find any time that any of my REIT holdings have ever cut their distributions. While Canadian residential properties did participate in the global real estate bubble, REITs are grounded because they have to meet and exceed their financing costs. So they operate within tight financial confines and although their asset base may fluctuate with the market, their incomes and expenses are both well defined going ahead for many years.

Here is the biggest component of the REIT index, the bellweather Canadian REIT, RioCan:

Right now it is yielding almost 10% - the last time it had this yield was way back in 2001 at a much lower price. This is of course, assuming that the yield is safe and won’t be cut.

What a wild day. Everyone knew coming in this morning from the markets which opened in Asia that this would be one for the books. The intense and indiscriminate selling that we saw today can only be characterized as forced liquidation.

People are not selling just because they are fearful, or because they think the market is going lower. They are selling because they have to. We’re seeing massive deleveraging. Here are some more highlights:

• the volatility index (VIX) goes to 52.05
• even “safe”, boring stuff that held up until now is getting liquidated
• brokers put in stricter margin rules
• down volume was overwhelming - do the specifics really matter anymore?
• NYSE new lows goes to half securities traded, matching Black Monday 1987
• surprise! the bailout plan doesn’t live up to its name
• less than 6% of S&P components are above their 50 day moving average
• S&P 500 is about 20% below its own 200 day moving average (see below for graph)

Here is the chart of the S&P 500 index (SPX) compared to how stretched it has become from its long term moving average. For more details about this indicator, check out: How the Stock Market Resembles a Dog on a Leash.

Ultimate Fade?

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week…I don’t want people to get hurt in the market.”

Remember, this is the “Paris Hilton” of the investment world speaking. Someone who froths at the mouth almost daily, dresses up in diapers to recommend Kimberly-Clark (KMB)…. uses a ridiculous sound board to accentuate his manic “advice”… and now he is as somber as a funeral parlor. Watch:

I don’t want to be mean and kick Cramer when he’s down. I’m just pointing out something that he himself has said. When he gets overly emotional, either way, he is wrong and a great fade. At his old hedge fund he had his wife (who he calls the “Trading Godess”) who would force them to take the other side when this happened. Most famously, she did this before the 1987 crash and not only saved their hides but made them very wealthy. Unfortunately, she is otherwise engaged these days and can’t pop in front of the camera and save regular folks who may be contemplating taking her husband’s advice.