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Double Whammy – Rates Moving Higher and Government Shutdown

With the 10 year treasury hanging around the 4.50% area and looking for reasons to go higher yet and the very likely possibility of a government shutdown equities are weak once again this morning.

I read that going into a government shutdown typically brings a 8-10% reduction in prices of equities, but they bounce back nicely over the course of the next number of months. Certainly we have seen prices falling during the last couple months with the S&P500 off approximately 5% certainly we could see another 5% in the next couple weeks. Generally speaking a government shutdown doesn’t affect the way I will invest–ever thinking you can react in a helpful way to events like this is typically a fallacy.

Yesterday I didn’t do anything, but I did notice a 5.75% JPMorgan CD available on eTrade–why buy 5.75% when higher rates are just around the corner? A hot PCE (personal consumption expenditures) later this week would send rates up toward 6% and a conservative investor would have to do some heavy buying at that level.

I noticed in the comments on this site that folks are starting to look at REITs for potential purchase–seems like a decent idea because of the good correlation with movement in interest rates. I noticed Brad Thomas has a ‘sell’ article on WP Carey today–has Brad ever published a sell article? With this sell I feel compelled to review WPC as a potential buy. Anyone covering REITs on Seeking Alpha has been mostly ‘creamed’–as most all the big names have been decimated–Realty Income (O) the darling of all the writers, is trading at a 52 week low and all the writers have been ‘backing up their trucks’ all the way down. The problem with most writers on Seeking Alpha is they confuse good fundamentals with rising stock prices—anyone can look and see if the income statement is currently good–but what are the micro and macro economic factors and what has history shown drives equity prices in a certain sector. The criticism of these folks has been fairly heavy–and well deserved–if you say ‘buy, buy, buy’ and a charge a fee for bad recommendations you should expect criticism. Well let’s look for some buys in the REITs – a bottom will come in them and super capital gains may be ahead–but when?

18 thoughts on “Double Whammy – Rates Moving Higher and Government Shutdown”

  1. Regardless of what they are saying on SA, don’t you think O at > 6% yield is a decent buy?

    1. I think O is a great buy here, as is ADC. Other REITS I would wait on. O borrows for less than the interest rate of the US gov. Its properties are real assets that should keep their value during an inflationary environment. They have lots of recession resistant properties, having spun off their office properties and most movie theaters post-COVID. They have started diversifying outside the US, and have a ton of investment grade customers paying the rent. ADC is even safer. WPC had some company specific issues – whereas O and ADC seem to be being sold off as part of an interest rate rising macro trade. Nothing wrong with O and ADC. By the way, the REIT sector always sells off approx 30% going into recessions, it’s pretty standard actually. Of course, when times get tough, it’s best to own the safest, and during recovery diversify into some high flyers for a little extra return. The strongest companies tend to consolidate the industry during tough business conditions. I’m a buyer here of O and ADC. Waiting for a bottom to go into any other REITS (SRC, GTY, EXR and SUN are on my watchlist). CCI and AMT starting to look really tasty as well – although CCI is experiencing some legitimate growth issues due to the Sprint/TMobile merger, so it’s not just caught up in the “interest rates are rising so sell REITS” trade. Of course, I don’t think the bottom is in yet, there will likely be another Fed Rate hike by the end of the year, so it may be early. On another unrelated note, GAM-B has been trading below par lately and that almost never happens, and it is super safe. Unfortunately T-bills are creating competition for it.

    2. Historically buying O when it yields greater then 6% has always been a good buy. The only trouble is that the buy can possibly get better in this environment. I do not think it is at a bottom yet. A lot of pressure from sellers. I bought my small position at a low during covid and I have been noticing how the price keeps creeping down to my purchase price of 42ish. If it drops a bit more I may have to make a purchase and add to it.

      1. You could sell the Nov $45 puts for 50c or even the $47.50s for $1.00. Worst case then is you own it at $44.50 or $46.50 if the stock closes below $45 or $47.50 in Nov. Best case is you collect the premium without ever owning the stock (2 months worth of divvy or 4 months, respectively). I have been looking at this strategy for awhile now with O.

      2. I actually sold the Oct $50 at $1.47. I’ll own O in 23 days at $48.53 worst case. I’m thinking that chart is very oversold though so will look to collect at least 70-75c per contract soon. No biggie either way.

  2. The author who put out a sell recommendation on WPC today had a buy on WPC just a week before it crashed. Best buying opportunity in years, he said.

    My problem with that author is that he writes really well, does cogent analysis and is very persuasive. He’s also wrong quite a bit. My solution is to not to buy when I see his recommendations and to remember the Greek myth of the The Song of Sirens.

    The Sirens were beautiful ocean-dwelling mermaids who sang sweet songs when ships passed by. Their sweet songs lured many sailors to jump overboard to their deaths. Odysseus (hero of The Odyssey) wanted to hear The Sirens Song but not lose himself or his crew. He ordered his crew to put wax in their ears and to tie him tightly to his ship’s mast.

    When visiting The Other Website, just remember to tie yourself to the mast of your ship and sail by before you sell or buy.

    (Also not a bad idea to do a little reverse Crystal Ball engineering by looking up an author’s old buy/sell recommendations if a stock suddenly crashes.)

    Just my opinion.

    1. In fairness, BT did a follow-up Mea Culpa- basically anyone can err. The problem stemmed from WPC doing their slight raise and a week later doing a spin-off of part of the business. A bit blind-sided.
      Still, good to have some rope for the mast- 10 to 12 articles later.

    2. I’d like to thank Tim for APOS. Bought it at 25.70. It’s actually up since I
      Bought it. The only stock I’ve bought all year. Can’t pass up CDs and bonds.
      Anyway that was a good call.

  3. The only REIT I own is UMH, which is more of a specialty niche situation. I may add some more, can’t see manufactured home communities shutting down anytime soon.

    1. This is one several people here already own
      This is not, I repeat is not a recommendation. DYODD

  4. Tim, what might be considered some of the better quality reits have bounced back from their lows of the year. No being a technical chart person but more of a trend person I use the charts to look for bottoms. Several of the reit preferred have hit certain lows this year and that is where I have been entering. I don’t always pick the bottom, but I leave room in the stable to buy more if I am convinced its a good company. I lower my cost and have been able to flip the stock when it has risen to balance back to what I am comfortable with holding. If the government shutdown occurs ( it’s looking more likely) then a 5% move down it the market might be enough to pick up some of these preferred at their lows

      1. Alex, there are several trailer park community stocks. Several that are of higher quality than UMH. As 2WR likes to say, they are the Rodney Dangerfield of this sector. But with a large part of the business being held by family they have an interest to succeed.
        I have observed over the years there are tiers to the housing market. Depending on what people can afford there is everything from Condo’s to single family homes to estate gated communities. Trailer parks are one of the few places in the lower rungs of our society that people can still say they own their own home. I hate what I have been hearing lately that now PE has been targeting trailer parks and buying them up and raising rents beyond what long time residents or people on fixed income can afford.
        So anyway, this is my one of several Rodney Dangerfield stocks I own that get no love from Mr. Market.

  5. It is a triple whammy. Starting 10-1, the annual GDP is forecasted to decrease by 0.25% – 0.30%. The economic impact of restarting student loan repayments.

    1. Key part:

      “A shutdown would be credit negative for the US sovereign. While government debt service payments would not be impacted and a short-lived shutdown would be unlikely to disrupt the economy, it would underscore the weakness of US institutional and governance strength relative to other Aaa-rated sovereigns that we have highlighted in recent years.”

  6. Commercial property giant British Land said Facebook owner Meta has surrendered the lease on one of its London office buildings as technology firms continue to slash their costs. Meta paid the FTSE 250 developer £149 million on Monday in order to break the lease on the building, 1 Triton Square.

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