Juggling Dynamite

We bought interest sensitive, dividend paying equities in 2003 and 2009, after they had crashed lower by 50%. After soaring above reasonable value over the past three years on QE, we see evidence to suggest that the third price mean reversion process since 2000, is now in progress. The below chart of the Canadian Real Estate Investment Trust ETF (XRE) demonstrates why it pays to respect the inevitability of mean reversion cycles. Those impatient or desperate for “yield” always make the same mistake, buying and holding at every price, they then lose years of income in a matter of weeks as share prices fall back below long-term averages. As shown below, REITS have so far lost 15% since May (nearly 3 years of income in just over 2 months) and counting. Around $15 today (from a high of nearly $18 in May), the 2003 and 2009 lows brought entry opportunities around $6.00 with income yields of more than 8%–a risk/return ratio worth waiting for again. By then of course, most of those holding today will be selling in horror after losing large chunks of their capital. They will then fire their broker or long-always manager and move to cash just as prices are finally attractive. And so the cycle goes…

Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.

This morning the July US jobs report missed optimistic forecasts and June’s previously reported number was revised lower. Most significantly, the labor force participation rate ticked down once more while personal income grew less than hoped and June’s income numbers were revised down as well. The real economy is WEAKENING, not strengthening, and yet central banks are at the end of their magic tricks.

Mohamed El Erian was trying to explain this to the CNBC crew yesterday. As one listens to Joe Kernen mock El Erian for being concerned about disconnected stock prices for the past couple of years as stocks have continued to rise, it is worthy to note that Kernen (a former stockbroker) has been permeating perpetually bullish comments about stocks since the late 90’s as listeners have suffered heart wrenching volatility in exchange for zero real gains. But of course, no one ever holds CNBC to task for their risk-hyping machine that helps insiders pump and dump their stocks onto gullible viewers.

A tapering of the Federal Reserve’s $85-billion-a-month bond-buying program this year is “almost a given,” but there won’t be enough economic growth to justify the reduction, Pimco’s Mohamed El-Erian told CNBC on Thursday. Here is a direct link.

Danielle was a guest today on the Financial Survival Network with Kerry Lutz discussing recent trends in the world economy and markets. You can listen to an audio clip of the segment here.