Trader’s Narrative

I wanted to write about this during the holiday season but it being the holidays it got pushed to the new year.

Canadian REITs as a group were pummeled beyond belief during this bear market. Personally I’m surprised to see this because generally speaking they are a solid business model. Not over leveraged, diversified and recession-proof (for the most part).

There is no way that their market valuation should be cut in half - or more! But it goes to the heart of this bear market that even the highest quality securities are being sold off to raise cash, meet margin calls, de-leverage and reduce risk in portfolios.

By now this market dislocation is obvious as Canadian REIT prices have screamed higher in the past few weeks - some rising 25% and others up to 50%. I think they will probably give up some of that increase and take a breather. But considering how extremely oversold they got, they continue to present a very compelling value here.

Here are the 5 largest REITs by capitalization:

• Riocan REIT — (REI.un)
• H&R REIT — (HR.un)
• Boardwalk REIT — (BEI.un)
• Canadian REIT — (REF.un)
• Calloway REIT — (CWT.un)

H&R REIT was under a dark cloud and got taken to the back of the shed in 2008. Their share price fell from a high of $27 in 2007 and a high of $21 in 2008 to just $4.45. Since then doubts about their financial stability have been removed by their announcement of a distribution cut and debenture sale. HR REIT shares have gained almost 100%.

Here’s a chart of Riocan REIT, the largest in Canada. Over the holidays it reached a yield of just over 10%. That’s equivalent to levels which we last saw in early 2001.

At that time, the Bank of Canada interest rate was 5.5%. Right now, the interest rate is 1.5%.

That’s significant to bring into the picture because it shows that 8 years ago, an average investor had alternatives to Riocan REIT which yielded much higher returns than right now.

This just brings home how irrational these valuation levels are for Canadian REITs right now.

Insiders Buying
As you might expect, insiders are not oblivious to this. They have been actively buying shares of their companies even as they have continued to fall.

For example, Calloway Real Estate Investment Trust trustee Mitchell Goldhar bought 37,100 trust units through CWT Investments Ltd at prices ranging from $8.60 to $9.75 each on Dec. 4 through Dec. 10, 2008, bringing these total holdings to 10,889,413 shares.

And Riocan REIT chief financial officer Frederic Waks bought 5,400 trust units at $13.22 each on Dec. 4, 2008, bringing these total holdings to 200,956 shares.

Although you may have missed the extremes, as long as you’re smart about it and don’t chase the price higher, I don’t think you’ve completely missed the buying opportunity here.

Here is a recap of the important sentiment news for the past week:

Sentiment Surveys
Retail investors and traders continued their complacent mood. According to Wednesday’s AAII sentiment survey, the bulls increased to 44.83% and the bears continued to fall, reaching a mere 33.33%.

Tuesday’s results from ChartCraft’s Investor’s Intelligence weekly survey resulted in an increase in bullishness to 30.3% and decrease in bearishness 48.3%

I continue to be a little disappointed by the rapid mood change shown by these traditional sentiment indicators.

Corporate Insiders Buying
Various sources of data for insider activity is showing a marked uptick in buying. Corporate insiders are considered to be “smart money” so this is a good sign. The fact that they are now buying cheap stocks means that they believe that stocks have fallen enough to be a compelling value. This isn’t so much a sentiment measure as a real measure of behavior. So in a sense it has more weight because what someone says on a survey is one thing, but what they do with their cold hard cash is another.

Volatility
Volatility hasn’t imploded, yet. But we are off the all time record highs of both the VIX and VXN. As well, we seem to have put in a small lower high with the VIX index ending at 55.14 - now it needs to put in a lower low.

Seasonality
The stock market has entered into positive seasonality. Although this doesn’t guarantee in any sense that the market will go up, it does mean that we have the wind at our backs. This may mean nothing when you consider that we are having one of the blackest black swan years.

Rydex Nova Ursa Ratio
It has been a while since I mentioned this sentiment indicator. Mostly because it wasn’t registering any extreme readings. Except for the most recent data point from late October.

The Rydex mutual fund family is in danger of becoming a vestigial financial vehicle. For those unfamiliar with this indicator it used to be the fast moneys preferred choice since it was the only mutual fund priced more than once a day and offered a way to profit from both the rise and fall in the market. Of course, with today’s plethora of ETF and levered ETFs Rydex has been left in the dust.

But the most recent ratio shows that the fast money switched heavily into the bearish market timing fund leaving the bullish one in droves.

Magazine Covers
Here are two interesting recent magazine covers. These are worthy of note and perhaps good contrarian indicators because they are general interest publications which usually do not focus on the economy or the financial markets. So the fact that they have devoted a cover and made it so excruciatingly negative in its symbolism is telling.

Source: Esquire Magazine cover article and New Yorker magazine