Tack

Thoughts on REITS, Financials and the U.S. Dollar

A couple of comments:

1) Diversification can be attained in myriad ways. Certainly, there's no need to avoid REITs, especially commercial REITs, which seem positioned to offer serious upside potential as the economy gradually recovers. Commercial REITs, such as HRP, NRF, DRE and others, are currently priced at 15-25% of their three-year highs, even after the recent rally in share prices. They remain severely depressed because the conventional wisdom keeps waiting for the commercial-realty shoe to drop. However, many commercial REIT's have remained profitable throughout this major downturn and, also, have built up sizable reserves against future losses, even while remaining profitable. My guess is that the bark is worse than the bite will be, as regards commercial realty, and that from their low present values they will offer sizable percentage returns.

Also, many of these REITs offer very attractive preferred shares, which afford outsize dividends that have a very low probability of being cut or suspended. Such shares offer nice returns, even if capital gains are slow in materializing.

2) A new theory developed early in this recession that overseas economies and markets, including China, would continue to thrive, despite our woes. It was quintessential "this-time-it's-differ... thinking. Instead, they plummeted along with the U.S. and even China required a massive stimulus program (at least they have the reserves). The second half of this equation will play out equally, I believe, i.e., either we'll all recover or none will. Personally, I vote for the former, at least in nominally-measured terms.

This means that all world economines will generate renewed demand, when for the first time in decades we've had meaningful reduction in supplies and in capacity. This, coupled with trillions in newly-minted currency that has yet to be fully realized in the system, suggests to me that inflation is a very real threat, an almost inevitable occurence, about which we should be debating whether it will be year one, two or later.

The only way this could be blunted would be if governments, especially the U.S. government, were to pull huge amounts of liquidty out of the economies prior to inflation really picking up steam. The track record for such responsible action is almost universally poor, as politicians are much better at giving than taking away.

My general conclusion, therefore, is to plan for gradual recovery, buy depressed shares and plan for inflation.