GOLD AND SILVER HAS BEEN THE KILLER

http://screencast.com/t/yQOX4fOn6ur

 

http://screencast.com/t/VQJAxmH1Bf

 

AUTOMATED TRADING SYSTEM EXPERIMENT

I have embarked on automated trading system (ATS) experiment whereby I leave a bot to do all the trading and money management for the whole week. I turn the machine on Sunday and off on Saturday night, all the rest is done by the bot.

I will post regular performance updates, here is the first, as you can see we are currently losing $87k. Not a good start.

 

http://screencast.com/t/VQJAxmH1Bf

 

DO REITs OFFER DIVERSIFICATION

Wednesday, July 13, 2011 2:45 PM ET
To reap real estate's full benefits, investors need more than REITs, academic says

By Tom Yeatts

If you're looking to capture the full benefits of real estate investment, you'd be wise to venture beyond REITs. That's the finding, at least, of Andrey Pavlov, associate professor at Simon Fraser University's Beedie School of Business, whose recent research has led him to the conclusion that the asset class alone does not fully reap the advantages of diversification, real estate's real draw.

"It was my hope, and many other people's hope, that now that we have REITs and they're well-developed, all you need to do is invest in REITs and that gives you exposure to real estate," Pavlov told SNL. "Regrettably, the data so far is showing that that's not as true as we hoped."

Pavlov, with Susan Wachter, a professor at The Wharton School at the University of Pennsylvania, recently conducted research to broadly determine the relationship between REIT valuation and the underlying real estate. To what extent are REITs' stocks driven by their holdings, and to what extent by other factors?

Utilizing the Moody's/REAL Commercial Property Price indexes, Pavlov and Wachter created a "shadow" portfolio that matches the property type and regional exposure of the REITs. Over time, they determined that, for each of the property sectors except office, there was no "statistically significant" relationship between the return of the REIT and that of the underlying real estate. And the other sectors — retail, multifamily and industrial — offer only "very weak and insignificant" correlation.

"This finding suggests that direct real estate investment or investment through the property price index derivatives cannot be replicated using REITs," Pavlov and Wachter said in a paper, published by at the end of June, titled "REITs and Underlying Real Estate Markets: Is There a Link?"

Notably, they found that when market conditions were favorable — low interest rates, rising property values, increasing industrial production — REITs across the board performed well. But in a down market, there was real separation and, accounting for all the variables, the management component made the difference.

"In economic stagnation … only the best managers do well, thus the value of management increases," they said in the report. "This increase dampens the negative effect of the economic downturn and weakens the relationship between the REITs and the real estate properties they hold."

So why the relatively strong correlation between the performance of office properties and the REITs that hold them? Pavlov offered the effect of agglomeration, or homogenization, as a possible cause. He noted that many of the office markets where REITs have exposure, particularly the central business districts, are densely packed, and property values move together.

For retail centers, which are spread far and wide, the situation is precisely the opposite. "You don't want any agglomeration, because to you, agglomeration is competition," Pavlov told SNL.

So there are two possible explanations for the relatively strong correlation between office REIT stock performance and the return on the underlying real estate, Pavlov said: "Either REIT management matters a lot for retail and less for office. Or, it matters the same, but we are better able to capture the returns to real estate in the office space that we can't really do all that well in retail."

Either way, Pavlov is firmly convinced that REITs, though they represent a solid, maybe even an essential, component of real estate investment, do not alone fully capture the diversification benefit.

"REITs alone don't do it. They're still better than nothing; if you're only going to do stock market-type investments, REITs do offer diversification. … But if you want to go even more into real estate, you have to buy direct assets or the indices."

 

AREIT FORECASTS

Lets start with a look at the dividend yield on its own. What is interesting from this chart is that Australian REITs look expensive on a historic basis.

However, it is important to give dividend yield context to the interest rate environment currently prevailing.
Here we look at the spread of the 10yr government bond as well as the 3m shorter term government bond.



The long term spread is also on the marginally expensive side of things, as well as the short end of the yield curve.



Interestingly the shape of the yield curve is exceptionally flat with long term yields only marginally higher than the short end. What is clear from this chart is there no inflation being priced in. 




When I look at the total return index we see a very sick looking chart, despite the recent capital raising shareholders who entered the AREIT sector in late 2006 are so far under water that it will take a lifetime to recover this investment. What I take away from this chart with its Bollinger Bands narrowing over a sideways moving market is that a breakout movement is probably fast approaching. Unfortunately which way the market will break is less clear.


Finally from a trending perspective we are at a very important level. We have the 50day exponential moving average about to intersect with the 200 day EMA, a break of the 50d above the 200d will be a bullish signal with a movement of the 50d below the 200d will be bearish. There is however an extremely rare occurrence with the actual index intersecting the "Death Cross" described below. This tells me that we are probably at an extremely important point, whereby the sideways movement of the last year or so is about to be replaced with a firm trend.