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*****From a Sigh to an Ugh
*****The Magic of Statistics
*****Top Performing Mutual Funds
Yesterday was a “sigh.” Today is an “ugh.” The labor market in the U.S. just
can’t get any momentum going.
Today’s non-farm payroll number for July came in lighter than expected. And
the number of job losses came in higher. Put those together and you get a bad
overall employment number. Ugh.
Through the miracle of statistics, the unemployment rate held steady. But it
doesn’t really matter. Every investor knows that number is a sham, and stocks
would be off today even if the “official” unemployment number fell to 5%.
I’ve said repeatedly that employment will be the last sector of the U.S.
economy to show gains. But it still feels like we are being overwhelmed by
the negativity of the employment numbers.
It’s not like the weak turnaround for employment is a surprise. From the very
beginning of the recession, many economists were saying that unemployment
would remain high for years. And even on a common sense level, it’s clear
that many workers who were dependent on the housing market will not get their
jobs back anytime soon, if at all. Construction workers, real estate agents,
mortgage brokers – the sooner we recognize that many of these jobs are gone
for good, the sooner we can get on with re-training or whatever else must
happen to get these folks working again.
In the meantime, investors are losing patience.
*****Part of the frustration, too, is the clear imbalance of corporate
profits and unemployment. Companies could hire and not affect their bottom
line too badly. But what is their incentive? Why should they hire when
profits are booming as it is?
For investors, it’s hard to imagine a continued surge in profits (and
valuations) while demand remains weak. And so stocks are having a hard time
holding their valuations.
Sure, we’re enjoying a nice rally. But do you think it will continue without
some good news for employment? I continue to add quality stocks on weakness
and then ride it out. Because this economy will turn around. Eventually.
*****If you had to guess which mutual fund sector has posted the best gains
this year, would you guess technology funds? Or how about emerging market
funds? Well, according to Morningstar, real estate funds are the winner. Yes,
really.
With an 18% average year-to-date gain, mutual funds that invest in REITs
(real estate investment trusts) have outperformed all other sector based
funds. REITs own commercial real estate, survive off of rental income, and
tend to pay above average dividends.
Some investors have been scared off of commercial real estate after the
housing bubble drove the value of real estate (commercial and residential) to
multi-year lows. And bankruptcy and downsizing at corporations drove rental
income significantly lower as well.
Now, with banks still reluctant to lend, concern that loans coming due won’t
get refinancing is keeping investors away from REITs and other commercial
real estate stocks.
But the thing about real estate is that it has intrinsic value. And depending
on your financing terms, you can make money with rent even in tough economic
times. That’s why private equity firms, hedge funds and even sovereign wealth
funds are lined up to buy commercial real estate assets.
In some cases, defaulted mortgages have sold for $0.90 cents on the dollar.
And that’s because the buyer knows he/she will make money, which indicates
any financing costs will be low.
Ironically, pent-up demand for commercial real estate has set a floor under
prices. Private equity isn’t getting the bargains it expected. I expect the
pace of deals to accelerate as investors attempt to lock in what bargains
they can get, before prices recover more. And at some point, that will lead
banks back into the commercial real estate market and lift the dark cloud
that continues to hang over the sector.
I’ve prepared a Special Opportunity Report that details a few commercial real
estate stocks that are poised for big moves higher as private equity
continues to support commercial real estate prices.
You can read that report
HERE.