Monday, June 18, 2007

So Good It's Bad

The world seems like such a happy place this morning that Macro Man is suffering from a severe lack of inspiration. Friday's data was, in the context of the way in which markets choose to view the world these days, about as Goldilocks as it gets. Core CPI and capacity utilization data where lower than expected, thus reducing the perceived threat of inflation, while the Empire manufacturing and TIC data were strong. What's not to like?

Certainly asset markets could find very little, as everything from the Turkish lira to JGBs have put in a nice rally since 8:30.01 EDT on Friday. Even more RBNZ intervention, a potential risk to the FX carry trade, was viewed as offering the kiwi dollar on sale, rather than a threat to the profitability of existing positions. A test of the RBNZ's will, via a market attempt to push the NZD higher, seems likely.

So, Macro Man finds himself in an unusal spot. His P/L is up very nicely indeed this month; even the table below understates it, as the SPY and XHB positions went ex-div on Friday. The combined future dividend flow represents another $300k or so of profit, which would take his YTD P/L up above 10%. The vast bulk of his short equity exposure rolled off on Friday, so his long exposure to equities has gone up substantially. He can find little reason to worry at the moment, and doesn't feel particularly inclined to re-establish equity shorts in the alpha portfolio. In other words, he feels fat, contented, and complacent.

And that's bad.

While there's not much utility in worrying for the sake of worrying, it's still important to be prepared for any negative developments in the pipeline. While there's no obvious catalyst that could take bond yields up and through the highs, there wasn't much of a catalyst that got them there in the first place.

So while Macro Man lacks the inspiration to dissect Friday's data (those interested in the TIC and current account data, both of which suggest a reduced imminent threat from external imbalances, should visit Brad Setser's blog), and fails to see any speedbumps on the horizon, he's less happy than he ought to be. It's harder to deal with a "crisis" that you cannot foresee.

For a natural worrier like Macro Man, this market is now so good that it's bad.


"Cassandra" said...

"S15REAL Index GPC D"

There could be one of the most vivid telltales of what is to come. First, Private Funds devour REITs whole. The Sam Zell drops his entire position to Private Equity. This is followed by great reticence of The Market to buy US commerical real estate. OK so we are nearing the end of the quarter and so some of this is likely to be Q-on-Q sector relative perf games.
But where are the real asset players? Where is MacQuarie-like real asset investors? There is apparent value emerging, with cap rates between 6 & 8%... unless one believes the US is headed for substantially lower dollar, higher rates, a reasonable recession, or all the above....

Macro Man said...

I wonder if the "32.99" next to the "price-to-earnings" label that I see when I hit DES has something to do with a higher rate environment, perhaps the market is less willing to pay up? Surely an index where the earnings yield is lower than the dividend yield must raise a few caution flags.

More prosaically, I notice that the most turd-like of the ABX indices are rolling over and starting to play dead again. Perhaps that's where the next penny/shoe/risky asset will drop. I feel very naked indeed without my short SPX call hedge...

As an aside, I loved the BOJ entry exam. I might not agree with your analysis of the BOJ's nefariousness, but I still got a giggle out of it. Well done.

"Cassandra" said...

Thanks MM, re: BoJ Entry Exam. In a similar vein, I am conjuring a tasty post detailing the posh but inflated menu/fare at a pub on the Chelskea-Prospekt called "The Liquidity Room".

The PEs of reits are not terribly indicative. FFO (Funds From Operations) are the basis of analysis in REIT-land since (if my accounting knowledge is correctly recounted) GAAP depreciates land and buildings in ways that are not reflective of the reality of real estate in addition to acquisitions and disposals also throwing proverbial spanners in the EPS works. I would have thought he S15REAL has an weighted P/Estimated FFO of something like 17x next year and 15x FY2, which translates in an earnings yield of 5.7 and 6.9 respectively. Given the hard-asset nature of the physical asset that gives a put against hyperinflation, 150 over treasury in nominal terms (in this envirOnment) is not horrible consider Macquarie are sucking 3 or 4% cap rates on some of their infrastructure investments ostensibly recycling petro-surpluses.

Of course the more adventure some and less quality concious can create a diverse US REIT portfolio with cap rates closer to 8.5 to 9% that are only mild leveraged.

Anonymous said...

With my shorts expiring on Quad -Witch , I have similar positive feelings --- also a worry . When that happens I lower my strikes when selling calls and cut back on some longs .... sometimes I feel better when I'm worried rather than when I'm manic

Macro Man said...

Anonymous, I always feel better when I'm worried!

C, aren't REITs mandated by law to pay out 90% of their FFO? In that case, the div yield of 3.81% would represent an FFO yield of roughly 4.25%, which wouldn't appear to be a no brainer. I may be wrong, and/or future FFO might play out as you suggest, so feel free to correct me if the above analysis is flawed.

"Cassandra" said...

My numbers are a rough simple average of the P/Estim FFOs.

You're prob not far off, but that's because several of the largest caps - BXP SLG AVB (that skew the div yield) also have the highest growth so estim FFO is much higher in fwd Y1 & Y2, as presumably will be their dividend growth and so dividends paid.

I am no real estate or legal expert, but I think the REIT legislation might stipulate a more nebuluous "earnings" against which they are forced to pay out which are gaap accounting "EPS" the less menaingful kind, which are typically less than FFO (which I think is ex some depreciation & acq & disposals) so leaving management funds to reinvest and grow.

For example. KIM earned approx 2.20 in FFO in 06, 1.40 something in EPS and paid approx 1.30 in tot divs. FFOs are typically the basis for eanrings yields and cap rates, and many analysts do not even bother working up EPS estimates given their inferior meaning in the real estate context.

Macro Man said...

Yeah, now that I give it more than a second's thought, you're right. A quick check of one of the REITs that I own PA reveals a div yield of 3.06% and a P/FFO of 14.4, so it must be 90% of "E", rather than FFO, that must be paid.