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2 Top Fears For Market Observers (And 2 Stocks To Buy)



  • Oil is sucking the life out of the market.
  • Banks made the situation worse by providing leverage.
  • Lower rates from the Federal Reserve could push banks to get a job.
  • Some landlords braced for economic destruction. Some didn't.
  • We can still lock in a low-risk yield near 7%.
  • This idea was discussed in more depth with members of my private investing community, The REIT Forum. Get started today »

This research report was produced by The REIT Forum with assistance from Big Dog Investments.

The stock market is having a terrible few weeks since 2/20/2020. The REIT Forum is down 6.13% during those weeks as of 3/9/2020.

The last few weeks have been dreadful for share prices. The decline has finally given us some buying opportunities. We are still in a very defensive position. We still have a substantial cash allocation and preferred shares are still the largest part of our portfolio as of 3/10/2020.

Why did oil and banks plunge?

The most recent damage to the market can be attributed to over leveraged oil companies and banking stocks.

We will start with the oil stocks.

Many companies in the oil and gas sector have too much debt. The excessive amount of debt makes lower oil prices extremely painful. They would be rough without high debt, but excessive debt kills weak companies.

To be clear, strong companies do not take on excessive debt in the first place.

On Monday, the Vanguard Energy ETF (VDE) plunged 19.82% in a single day.

It's remarkable.

Shares closed at $45.01. To put that in perspective, at the start of the year shares were more than $80 (red box):

Investors in the oil and gas space got slaughtered. Their losses are more than thrice the losses for the S&P 500 (SPY).

Low oil prices don't create a recession

We have consistently argued that low oil prices by themselves do not create recessions. Wall Street has consistently misinterpreted low oil prices. When gas is cheap, people spend their money on other things. Cheap gas does not stop the economy. Extremely low oil prices can be a temporary headwind as increased bankruptcy in the sector can create unemployment. Currently, unemployment remains very low which mitigates some of that

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This article was written by

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Colorado Wealth Management is a REIT specialist who began his decades-long investment career in a family-owned realtor office before launching his own company and embracing his drive for deep-dive REIT analysis. He passed all 3 CFA exams. He focuses on Equity REITs, Mortgage REITs, and preferred shares.

Features of the group include: Exclusive REIT focus analysis, proprietary charts and data models, real-time trade alerts posted multiple times a month, multiple subscriber-only portfolios, and access to the service's team of analysts and support staff for dialogue and questions on the REIT space.

Analyst’s Disclosure: I am/we are long ANGCO, AGNCP, EQR, ESS, MAA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (23)

Cuip99 profile picture
What makes you think people can pay the rent to fund REITs if their jobs, income is dropping. Everything will crash including banks and oil. Tech is taking a beating today in the market along with the financials. Hold on to your hat.
Colorado Wealth Management Fund profile picture
For future reference, today's price changes include:
CLPR down 11.0% (worst in sector)
IRT down 7.38% (4th worst in sector)
AMH down 7.26% (5th worst in sector)
MAA down 4.42% (small compared to sector)

Consequently, the calls here were much greater when the article was submitted (last night) and when it was published (before the market opened today) than they are tonight.
General Wade Hampton profile picture
I miss the days when Colorado would talk about the future of mREIT/cREIT common and prefds.
Colorado Wealth Management Fund profile picture
Am I not writing about the future of mREIT preferred shares in this article?
Thanks for the update. You state : Banks also have a second potential challenge. Banks earn interest from loaning out money. However, they also earn interest from not loaning money. The second concept is referred to as interest on excess reserves or IOER for short.
But reading the rest of the article, I fail to find the second potential challenge that's related to this IOER mechanism. Could you clarify or point to what I missed ? Thanks !
Colorado Wealth Management Fund profile picture
Oh my. Thanks Pete. In my head it was all connected but I didn't actually state it. When the Federal Reserve cuts short term rates, one of the main tools involved is cutting the interest rate paid on those excess reserves.

Thank you for highlighting that. Sometimes I forget to state one of those connections.
Thanks CWMF, that is a useful info, but I must be having trouble focusing because I still don't see how this could potentially be a challenge for banks.

There is a fire sale in NLY and AGNC preferreds today.
The 10yr UST is actually up. Any clues why such a big sale ?

Hungry for Knowledge profile picture
Wow, look at those AGNC preferreds drop 5 and 7% today.
I'm looking for them at $15 or less before buying
Of course, they may not go that low.
But they may.
AGNC preferred might go to 15. But if it does buying AGNC preferred
will not be primary issue I will be preoccupied with.
Colorado Wealth Management Fund profile picture
About a month ago someone was looking at a chart and telling me ARR was clearly going to $25.00 because that's what they saw in the line.


Since we're just randomly stating numbers, there are my random picks.
11 Mar. 2020
On oil and gas in debt...low interest rates would seem the perfect loan refinance catalyst to buoy the debt you address paralyzing the growth and recovery of this sector.
Colorado Wealth Management Fund profile picture
Low rates from the Federal Reserve can help lower the periodic cost of debt for floating rate loans. The difficultly is debt that may be fixed rate or debt that is maturing. You wouldn't want to give new loans to a company with a high probability of going bankrupt in the next few years. So the low rates aren't really available to companies with weak balance sheets.
Seatonmanagement profile picture
Sorry, not persuasive enough to invest at this time. Cash staying in cash, etc. Not buying "a falling knife". Maybe when there's some good news---oil is stabilizing due to new Russia/OPEC deal, Anti-COVID19-Vaccine found, Trade tariffs lifted, Government spending project/bill passes to take care of stimulating economy, etc. Not for now, standing pat.
Colorado Wealth Management Fund profile picture
I'm not going all in. I am happy to continue making small purchases on high-quality companies though. Lower risk preferred shares on sale catch my eye also.
AGNCN was trading 35 points lower than AGNCO at one point Monday, then over 60 points higher yesterday. Great opportunity to make a quick 4%. hedge against the drop. This crash has wild swings offering arbitrage opportunities for those paying attention.
Colorado Wealth Management Fund profile picture
Great opportunities. We finally get turned have bullish ratings again.

When the market is topping out, we have a harder time growing subscribers because we "can't find many buys". Many investors just want someone to tell them to keep buying 365 days per year. Now we only lost about a third of what the market lost and feeling ready to grow positions again.
Was IOER brought on by the 2008 Recession. If so it might not be as absurd as you make it out to be
Colorado Wealth Management Fund profile picture
Created as a response, but not really used for 7 to 8 years. Then when the banks wanted to use it, they kept calling it "normalizing". Something which hadn't been done in recorded history was called "normalizing". Can you imagine the laughter when that idea came up in a brainstorming session?
No I can't imagine the laughter. Times were pretty grim back then as you should remember. Now we have banks in trouble for their loans to O&G. As for your 7-8 yr. statement, didn't banks have to go through stress tests for yrs. after 2008
Colorado Wealth Management Fund profile picture
The idea of calling it "normalizing" may have come much later. That's the part where I suspect they were laughing. Several years after the crisis and they were ready to start paying interest on excess reserves. I think a better name would've been "profits on excess reserves".
EdT.cpa_Retired profile picture
I don't know if you should be bragging about having "a CPA on the team". I hear they are a quirky bunch! :-) Thanks for the article.
Colorado Wealth Management Fund profile picture
Thanks EdT! I love CPAs. Hardly ever met a CPA who rubbed me the wrong way. I can only recall one, and there was no evidence he was actually a CPA! I love precision in accounting. I love the clarity that comes from knowing all the numbers need to go together to create the financial story. It's that understanding which leads stronger analysis. In all fairness, I nearly went into accounting instead of Finance.
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