Yodaorange 2010 Pick Six

8/7/2019 Yodaorange 2010 Pick Six

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1/3/10 Revision 1.1Yodaorange

REIT Board 2010 Pick-Six

Executive Summary: REIT commons are forecasted to have a nominal return of ~ -4.5%.REIT preferreds are forecasted to have a nominal return of ~ +2.1%. These are less thanthe FDIC insured return on CDs, so I would NOT own these in the real money accountsI manage with the constraint they can not be sold until 2011. My portfolio managementgoal is different from most and the downside risk makes REIT investments unacceptable.For contest purposes, I lost the vote on allowing shorting, which killed my intendedportfolio. In order to participate, my goal was to choose 6 issues that would go down theleast in 2010. Not an easy goal. I would NOT recommend anyone invest in my Pick-Sixwithout further research or your part.

Discussion points:

1. REITs dominated by macroeconomics. There might have been a time whenREIT returns were mostly dependant on company specific financial performance.This has not been true in the recent past. Case 1 (Down Period) is from 5/15/8through 3/6/9. VGSIX declined ~ 69%. The median REIT common declined ~66%. 158 out of 163 issues had negative returns in this time.


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REIT common returns 5/15/8 through 3/6/9

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

163 Stock issues

Percentreturn(excludesdividends)

-65.8% median return

In this time period, an investor had a 3% chance of picking issues that would have apositive return.


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Case 2 (Up Period) is from 3/6/9 through 12/24/9. VGSIX increased ~ 118%. Themedian REIT common increased ~ 85%. 149/163 issues had positive returns in this time.


0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

163 Stock issues

Perc

entreturn(excludesdividends)

85% median return

In this time period, an investor had a 91% chance of picking issues that would have apositive return.

Main point is that FFO, FFO growth, P/AFFO, NOI growth, etc. were NOT thepredominant factors that influenced REIT common prices in these two periods. If youfocused on these microeconomic factors, you missed the bigger picture thatinfluenced prices.


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You might ask how the REIT commons performed since the Down Period startedthrough 12/24/9. VGSIX lost ~33% and the median issue also lost ~ 33%. 20/163 or13% had positive returns.


-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

163 Stock issues


-33% median return

I have chosen to focus on the macro factors for REIT analysis going forward. Thismight be the wrong approach. It might turn out that the micro factors will be themajor factors influencing prices. If this is the case, then I am at a major disadvantage,being the village idiot on micro factors compared to others on the REIT board. Therewill certainly be some issues that diverge from the REIT crowd. If you were able toselect the 3% (5 issues) in advance that rose in the Down Period, you would be aheadtoday by 85%, compared to a median loss of ~ 33%. I was NOT smart enough to pickthese 5 issues out in advance.


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The story is similar for REIT preferreds. In the Down Period, 0/165 or 0% hadpositive returns. The median loss was 52%.

REIT Preferred returns 5/15/8 through 3/6/9

-100%

-90%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

165 stock issues


-52.3% median


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Similar story for REIT preferreds in the Up Period. 163/165 or 99% of the issues hadpositive returns.


-100%

-50%

0%

50%

100%

150%

200%

250%

300%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

165 stock issues


+104.7% median


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REIT preferreds do look better than commons over the Down Period and Up Periodcombined. The median return is a loss of 2.5%, compared to a 33% median loss for thecommons. My interpretation is that investors are back to having faith that the preferredswill be paid in full, as opposed to not believing that during the Down Period. The factthat the commons are still at a loss would indicate that investors think that the common

dividends are at risk (certainly true for the issues that have cut, eliminated or paid out instock) and/or the dividend growth rate looks low by historical standards.


-110%

-90%

-70%

-50%

-30%

-10%

10%

30%

50%

1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121 127 133 139 145 151 157 163

165 stock issues

Percentreturn(excludesdividend

s)

-2.5% median return

My larger point is that both the commons and the preferreds price performance wasdominated by macroeconomic factors instead of company specific factors.

2. Portfolio goals. From reading posts on the REIT board, it sounds like mostposters have an investment goal of outperforming REIT averages. Possibly anunmentioned, but implied goal is to outperform the broad market, say the SP500. In

the Down Period illustrated above, the REIT index VGSIX lost 69%. The SP500 inthis same period lost 52%. If your portfolio consisted of 100% REITs, you wouldprobably be happy if you outperformed and lost less than 69%. If you lost less thanthe SP500, all the better. Same thing for the Up Period. If you outperformed theREIT index and/or the SP500 you would probably be happy.

I manage my portfolios very differently. I manage a large number of portfolios forpeople ranging in age from 17 to 88 years old. In some cases, the account owners


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only source of income is from the portfolio. In other cases, the account owner doesnot need any current income from the account. Some of the accounts are deferred taxand others are taxable. You might think that the goals of managing say the 17 yearold account would be radically different from those of the 88 year old account. NOTtrue. The overriding goal I have for all accounts is to have positive absolute returns

every year. The goal is to never have a year where the total return of the account isnegative. I never have a goal to outperform an index in an up year. If it happens, it isfine, but that is not the goal. This is called an Absolute Return strategy and iscommon amongst hedge funds.

I have used this approach for a decade+, so it is not like I am a recent convert. Itwould probably be pretty easy to convert the masses to this approach after the DownPeriod. However, it would probably be much harder to get converts after the UpPeriod. Most investors, both private and professional seem to have short termmemories IMO and definitely have a lack of historical understanding of the markets.Not that I am perfect, but without a strong historical understanding of the markets, it

makes it very difficult to have long term investing success IMO.

Stop reading NOW unless you have a high tolerance for depressingforecasts!

One period of time from 1966 through 1982 stands out in my mind from historicalstudies. I was not an investor at that time, so I had to rely on lessons taught by amentor that was an investor then. The DOW first crossed 1,000 in 1966. The DOWfinally climbed above 1,000 in 1982. In nominal terms, the DOW had 16 flat years. Inreal terms when adjusting for inflation, DOW 1,000 in 1982 was equivalent DOW333 in 1982. Investors lost 2/3rds of their buying power over 16 years.

Long story short, I think we entered a similar period in 2000. So in rough terms, Iexpect the DOW to have a net zero gain through ~2016. I do not have the time orspace to go through the detailed arguments behind this belief. Instead I offer tworeferences for further study if you are interested. Both of these gentlemen haveessentially the same forecast that I do. They use totally different techniques to arriveat their forecasts.

Reference one is a book: Stock Cycles Why Stocks Wont Beat Money MarketFunds over the Next Twenty Years by Michael A. Alexander. Please note that thebook was published October 2,000. So far, the subtitle says it all. Here is the Amazon

link to the book:

http://www.amazon.com/Stock-Cycles-Stocks-Markets-Twenty/dp/0595132421/ref=sr_1_1?ie=UTF8&s=books&qid=1262484943&sr=1-1

Reference two is a book and a website. The website is:

http://www.crestmontresearch.com/


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and the book is Unexpected Returns by Ed Easterling.

Here is the Amazon link:

http://www.amazon.com/Unexpected-Returns-Understanding-Secular-Market/dp/1879384620/ref=sr_1_1?ie=UTF8&s=books&qid=1262485137&sr=1-1

Both of these books lay out the case for expecting negative to low returns though ~2016.

In the 1990s, it was easy to have an annual return goal of 20%+ for your portfolio. Itwas also easy and good to have a goal of outperforming a particular Index. IMO theinvesting world changed in 2000. If you did NOT change your investing goals and/ormethodology you likely had a disappointing decade measured on an absolute basis.

Under the assumption of broadly having zero annual returns on average starting in2000, I set a lower goal of having +5% to +10% returns each year. I expectedinflation to be low ~ 2%, so the real return goal was +3 to +8%. I thought there weretwo broad based approaches to achieving these returns:

a. Stock market timing (For example, knowing when to buy/sell/short SP500index funds

b. Alternate investments that have low correlation to the stock market. i.e.whether the market rises or falls, the value of the investment is notmarkedly changed. A few million to low tens of million folks had thesame idea without realizing it. They decided that residential real estate wasnot correlated to the stock market and was a good way to invest theirfunds. We see how that worked out. It was the search for low correlationinvestments that lead me to REITs and this board. More on this later.

c. Make life simple and invest 100% in Money Market/CDs when the ratesare high enough. Unfortunately, for most of this decade, short term rateshave been too low to earn an adequate return. It hurts a lot when theFederal Reserve puts short term rates lower than the inflation rate like theydid from 2001-2004. They did it again starting in 2009. So for a majorityof the decade, you could not earn a reasonable return in Money Marketsand 0 to ~3 year CDs. This approach is a subset of case b.

Having an Absolute Return approach has many different implications:a. Set individual portfolio goals based on required/desired return. i.e., if you

can meet the investment goals by having a low percentage in equities,keep the remainder of the account in cash/cds. For example, maybe youonly need 25% of the portfolio to have an 8% yield, while 75% of theportfolio has a 3.5% yield.

b. Avoid highly volatile investments in general.c. Use highly volatile investments ONLY if you have a credible market

timing approach where you plan to get out early OR


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d. Use highly volatile investments in a long/short configuration, where yougo long one issue and go short an equal dollar amount of a different issue.For example, if you had used this strategy in the Down Period you likelywould have either made money or lost much less.

e. Be willing to sell out early when your goal has been met. Even if you donot know of a good reason to sell, you might say I am up 15% this yearand I will be happy with that and sell out.

f. Be willing to be hard headed beyond belief as the markets occasionallyleave you behind and you look stupid. Been there done that many times!

g. If you are a professional money manager, be prepared to be fired by somenumber of clients because you are underperforming.

h. Be prepared to invest a lot of time managing your investments. I do notrecommend this approach unless you have many hours per week to studythe markets and the inclination to do so. This is NOT a suitable approachfor MOST investors.

Points b, c and d are pertinent to this years Pick-Six contest. The Down Period andUp Period returns indicate that REIT commons are highly volatile, by anybodiesdefinition. If you MUST hold them for one year and can not sell them, then you can nothold them in any of the real accounts I manage. Alternately, if you must hold them forone year, but can not have a matching short, then you can not hold them in any of theaccounts I manage. Stated differently, my Pick-Six portfolio is nothing like I would everdo in any of my real accounts.

I suspect that I will be the only Pick-Six entrant that uses an Absolute Return approach.As documented later, I expect negative returns on average in 2010, so my portfolio returngoal is to have a positive return in the 5% to 10% range. No swinging for the fences here.Yes, I understand I might look really stupid on two fronts.

a. REITs might have on average positive returns in which case, I shouldhave looked for high alpha, high beta choices

b. I might be right about the market directions, but because I am trying toswim against the tide being long in a falling market, I might just havebad picks.

3. Everything moves in the same direction. In the Down Period, there was noplace to hide. Pretty much all stocks, REIT commons, REIT preferreds and bondswent down in value. All of the no correlation and negative correlationpromises went up in smoke. Tens of million investors had a very rudeawakening. Not to mention many academics and Wall Street professionals thatbelieved all of the previous research on Modern Portfolio Theory showing howdifferent asset classes were not correlated. REIT commons were certainly lumpedinto this category as some points in time. Many investors were told they had tohave a REIT component in order to diversify their portfolio. . . .


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Here is data on 8,942 stocks in my database. This includes ~ 100% of NYSE, NASDAQ,OTC and Pink Sheet stocks. It does NOT include REIT preferreds unfortunately. Theperiod chosen is longer than the Down Period shown above, however it still illustrates

the point that all ships sunk together. You had a 6.4% chance of picking an issue that roseover this time period. Good luck with that. . .

All stock returns 3/7/8 through 3/6/9

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

1 382 763 1144 1525 1906 2287 2668 3049 3430 3811 4192 4573 4954 5335 5716 6097 6478 6859 7240 7621 8002 8383 8764

8,942 Stock issues

Percentreturn(excludesdividend

s)

-60% median return

569/8,942 or 6.4% had positive returns

This point by itself would also preclude a real world portfolio consisting of 100% REITrelated stocks, unless market timing or shorting was permissible. So any Pick-Sixportfolio I choose will also violate the lesson from this graph.

4. REIT bubbles are forming around us. Finally, I get to something REITspecific. You must constantly be on the lookout for signs of financial bubbles. Bethey dotcom, residential real estate, commercial real estate or REITs, the signsare unmistakable IMO. I think this is starting in REIT land. These are anecdotesso there are no pretty graphs. The instances are:

a. A REIT boarder recently commented that he had recently attended twoseminars put on my major wire houses where REIT commons were beingpushed on retail investors.


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b. Here is a link to a recent announcement that Fidelity sent to a few millionof its investors pushing REITs on them:

http://personal.fidelity.com/misc/framesets/iwarticle.shtml?pagename=VP0910realestate

c.

Recently I had lunch with a few friends that work for a major,international tech company. The company had sponsored a famousindependent investment writer to come in and speak. My friends told methat one major take away point from the presentation was that they had tohave an allocation to REITs. They were asking me what REITS were andhow they should invest in them.

IMO, this is the start of a REIT bubble. It will probably take several years to play out, asopposed to by the end of 2010, but this is a factor to consider.

5.

REIT commons and preferreds are correlated to BAA yields. In a previouspost (http://boards.fool.com/Message.asp?mid=28176376) I detailed a report thatexamined the relationship between 5 different REIT preferreds and BAAcorporate yields. The main point was that not surprisingly, the correlation wasreasonable until the 2008 meltdown. The model DID accurately predict the timingof the meltdown. However, it was inconsistent in predicting the magnitude of thelosses in the breakdown. In the Down Period that is defined from 5/15/8through 3/6/9, the BAA yield increased from 6.91% to 8.18%. This would havepredicted a drop in REIT preferred prices ~ 13%. The median REIT preferredactually dropped ~ 65%. So the model did a poor job of accurately predicting themagnitude of losses in REIT preferreds. If you already owned REIT preferredsand were using the model, you might have decided to hold them because youwere expecting a 13% loss when you actually suffered a 65% loss. This is why Isay the model works well prior to the 2008 meltdown, but was not as usefulduring the meltdown. It got the direction and timing correct, but not themagnitude. One untold assumption of the model is that the company will surviveand continue paying its dividend. IMO the reason the model broke down isbecause investors were no longer convinced that the dividend was safe. Goingforward this should be a consideration when using the model. If we get back intoa period when preferred dividends are no longer perceived as being safe, we haveto understand that the model does NOT comprehend this factor.

One of the questions that arose was how/why I chose the corporate BAA yieldinstead of say a short term treasury. Here is copy of the data that I did notpreviously present. It is a correlation matrix showing how the 5 REIT preferredsplus the REIT Index Fund VGSIX correlate to different indexes. In all cases thebest correlation is to the BAA corporate. Interesting point is that there is a markeddifference between the correlation of 20 year US Treasury bonds and 20 yearAAA rated corporate bonds. Just goes to show that the full faith and credit ofthe US Treasury still means something.


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Also new is the graph of VGSIX and the BAA yield. Note that the RISK PREMIUM forthe preferreds ranged from .93% to 2.21%, however the RISK PREMIUM was -1.38%for VGSIX. My interpretation is that this is how the market compensates for dividendgrowth. We know that dividends do not grow on the preferreds. In normal times weexpect dividends on the commons to grow. That is one of the reasons that the nominaldividend yield is lower on commons than preferred.


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VGSIX Actual Yield versus modeled

3.00%

5.00%

7.00%

9.00%

11.00%

13.00%

15.00%

8/31/1999

12/31/1999

4/30/2000

8/31/2000

12/31/2000

4/30/2001

8/31/2001

12/31/2001

4/30/2002

8/31/2002

12/31/2002

4/30/2003

8/31/2003

12/31/2003

4/30/2004

8/31/2004

12/31/2004

4/30/2005

8/31/2005

12/31/2005

4/30/2006

8/31/2006

12/31/2006

4/30/2007

8/31/2007

12/31/2007

4/30/2008

8/31/2008

12/31/2008

4/30/2009

8/31/2009

Date

Yield%

Actual yield

Modeled yield

Risk premium= -1.38%

Even though the correlation is high (recall that the fit stops on 1/1/8), visually the fit doesnot look as good as on the five preferreds. However, in general it does model thebehavior fairly well in addition to accurately getting the timing correct for the crash.Clearly the magnitude of the crash was NOT accurately predicted by the model. Also,note that the actual yield and the modeled yield are back in line as of 12/24/9. Just to be

clear, the model is a general guide of how REIT prices will change versus changes inBAA yields. It is not that exact, particularly for an index like this.


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6. Short term treasury yields are POORLY correlated to long term treasuriesand corporates. Another issue came up on my previous post. How will a shortterm increase in fed funds affect BAA yields? I put together this graph to visually

answer the question. I only went down to 1 year treasuries, but the same ideaholds for fed funds, 1 month, 3 month and 6 month issues.

Interest Rates

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

9/20/2000

3/20/2001

9/20/2001

3/20/2002

9/20/2002

3/20/2003

9/20/2003

3/20/2004

9/20/2004

3/20/2005

9/20/2005

3/20/2006

9/20/2006

3/20/2007

9/20/2007

3/20/2008

9/20/2008

3/20/2009

9/20/2009

3/20/2010

9/20/2010

Date

Percent

1 YR Treas

5 YR Treas

10 YR Treas

20 YR Treas

AAA Corp

BAA Corp

The graph shows that the 1 year treasury has much larger swings than the 5 year whichhas much larger swings than the 10 year etc. By the time you get to the 20 year, you cansee that the curves are relatively independent. Same for the relationship between the 1year and both of the corporate issues. I could have shown a 50 year graph, but I thoughtthe shorter time frame better illustrated the point of independent movement. Also, notethat the market used to set the rates for the longer term treasury issues. In the last year,the Federal Reserve has starting purchasing some amount of treasury issues at alldifferent maturities. So it is not exactly clear what the rates would be without their

intervention.


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7. Pulling the rabbit out of the hat on interest rates. A main part of mymacroeconomic prediction has to do with interest rates. Pretty much a kamikazemission, but I have to do it. . . I would love to tell you I had some exotic, 28 factor

model that was guaranteed to accurately predict interest rates one year out.Unfortunately, the Einsteins on Wall Street hired all of the Physics/Math PHDsand built the models themselves. And they are NOT sharing. At the same time, wesee how well the models worked for Wall Street. You could have used the chimpsfrom the zoos to predict future interest rates and they would have been just asaccurate. So here is what I came up with after putting my chimp suit on:

Interest Rate Forecast

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

9/20/2000

3/20/2001

9/20/2001

3/20/2002

9/20/2002

3/20/2003

9/20/2003

3/20/2004

9/20/2004

3/20/2005

9/20/2005

3/20/2006

9/20/2006

3/20/2007

9/20/2007

3/20/2008

9/20/2008

3/20/2009

9/20/2009

3/20/2010

9/20/2010

Date

Percent

Hi +1.5

Med +.5

Lo -.5

Hi +1.25

Med +.5

Lo +0

20 Year TreasuryAAA Corporate

BAA Corporate

I have a range of forecasts for the 20 year treasury and the BAA corporate. The BAAcorporate ranges from a decrease of .5% to an increase of 1.5% with a nominal increase

of +.5%. Here is a brief description of the two extreme scenarios:

a. Decrease by .5%. Economy is booming and everyone is convinced thatcorporations are becoming better credit risks. Default risk is down. Also,everyone is banking on increased productivity and NO material increase inthe inflation rate over the next 20 years.


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b. Increase by 1.5%. There are three possible factors in this increase. One isanother recession appears, businesses are in trouble and the default riskincreases substantially. Factor two is that people think inflation willmarkedly increase over the next 20 years due to money printing. Factorthree is that 20 year treasury yields will rise when the fed stops buying that

paper. Given no increase in the 20 year-BAA spread, this will cause theBAA yield to rise. An increase could be due to any combination of thesethree factors.

Clearly, everybody else is entitled to their forecast of what interest rates will be one yearfrom now. I have high confidence in my forecast, but NOT in the next one year. I amtypically several years ahead of the trend on predicting changes like this. I would bemuch more confident if this was a 2 year out prediction instead of a 1 year out.

8. Predicted effect of interest rate changes. Putting together the interest rateforecasts with the RISK PREMIUM gives the REIT common and preferred

ranges. And the answer is:


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As you can see, REIT preferreds are predicted to have a positive 2.1% total return in thenominal interest rate case. REIT commons are predicted to lose 4.5% in that same case.The model predicted a much wider range of returns for the common as compared to thepreferred. For my Absolute Return portfolio management style, I would NOT normallyinvest in either class of stock at this time. For the preferreds, I can get a better return fromCDs without having the possibility of a loss. I would be willing to forego the potential14.6% gain. The commons lose all the way around with both a nominal negative returnand a wide distribution.

Once again, these results are for the typical REIT without considering any companyspecific information. One other assumption that I have made is that AFFO and common

dividend growth will be ZERO for 2010. If you assume either/or of them is positive, youwould get a better forecasted return on the commons. I understand this is a majorlimitation of my analysis.


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9. Number one elephant in the room. IMO, the Federal Reserve is having a major

impact on US Treasury interest rates through their Quantitave Easing programswhere they go on the open market and buy these issues. They also have a $1trillion plus program of buying Fannie and Freddie mortgage paper. The fed

claims that all of this will end in 2010. I along with many others do not see howthey can stop buying that soon. My guess is that it will be several years. I fullyexpect fed funds and the short term interest rates to remain low through the end of2010. I expect 20 year treasuries to increase. Related to this is the fact that foreignpurchases of US federal debt are decreasing. It used to be that we counted on theJapanese and Chinese to buy about half of the new paper that the treasury sold.The treasury will have to sell about 10X more paper in 2010 compared to 2009. Ido NOT expect foreigners to increase their purchases by 10X. If nobody buys thispaper, the fed will have to step in and purchase it through open marketoperations. In lieu of that, treasury interest rates could increase substantially,possibly even greater than my maximum forecast in the case of 20 year treasuries.

I can not see how the fed would let this happen, but it is not infinitely sustainable.What effect all of this will have on BAA corporates is unknown at this time. Atleast one analyst thinks the fed is outright lying about who is buying some of thetreasury paper. Here is the link:

http://www.sprott.com/Docs/MarketsataGlance/12_2009_MAAG.pdf

10.Number two elephant in the room. IMO plus many others, the fed is eitherdirectly or indirectly pushing up the stock market. The short form of the story issimple.

a. It is March 2009, and the American Public is getting increasinglypanicked. They see the stock market dropping every day. Confidence inthe country plus the administration is slipping by the minute. One sureway to increase confidence is to have the stock market go up so theadministration can say: The stock market is going up, things look better; Isee green shoots, etc.

b. It is March 2009, and the TBTF banks are in trouble. They need morecapital. Another bailout ala TARP will NOT be approved by Congress.They can not raise money via stock offerings because the investors areworried they will be allowed to fail, wiping out common shareholders.The fed and treasury realize the best way out is to boost the TBTF stockprices. Once the prices go up, investors can be suckered into buying morestock, particularly when the government has officially named them asTBTF.

c. As the overall market continues to increase, investor confidence isrestored and people are starting to believe stocks are the place to be again.Companies of all types can more easily issue stock and bonds. Thingsappear to be headed back to normal.


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d. This is likely one of the reasons; the fed is resisting being audited somuch. There are a lot of skeletons in those closets.

e. Clearly the fed truly thinks they have to take these actions in the bestinterest of the country, regardless of their legality. Kind of like OliverNorth in the Iran-Contra situation.

f.

IMO REITs have benefitted directly from the same program that pushedup bank stock prices. I think the stock prices are not justified based onfundamentals in either the bank cases or the REIT cases.

g. When, if and how this alleged fed stock market intervention ends isanyones guess.

There are several other elephants lurking, but in the interest of time, I will hope theydont come out in 2010.

11.Finally my PICK-Six methodology. I used three different approaches todetermine the six stocks. All of the approaches look at current and historicalprices. I spent ZERO time looking into the details of these companies, so mypicks are 100% technical as opposed to fundamental. I expect to be the onlyidiotstock picker that did not use company fundamentals for the selections. I alsospent ~100% of my efforts on the macroeconomic factors which is why I had zerotime for the company specific factors. DO NOT EVEN CONSIDER BUYINGANY OF THESE UNLESS YOU DO MORE COMPANY SPECIFICRESEARCH! In any event here goes:

a. Approach 1: Find REIT preferreds that performed well in the DownPeriod as well as in the Up Period. The hope is that these issues willoutperform on the upside if the overall REIT preferred market is weak. Ichose two:

i. CMOPRB, Capstead Mortgage preferred B. Lost 2.7% in thedownturn, gained 10.3% in the upturn, total roundtrip % changewas 7.3%. Also pays a 8.96% dividend. Plus the common is stillpaying its dividend.

ii. NLYPRA, Annaly Mortgage preferred A. Lost 15.4% in thedownturn, gained 37.4% in the upturn, total roundtrip % changewas 8.3%. Also pays a 8.1% dividend. Plus the common is stillpaying its dividend.

iii. It is interesting that both of these are the four letter word MREITS.I am not sure why these outperformed during the downturn, but itis probably not coincidental. Several other MREITS alsooutperformed, but I did not choose them for various reasons.

b. Approach 2: Find REIT commons that outperformed in the downturn. Ionly chose one and it is strange one, probably never discussed on theREIT board before this. It is PW, Pittsburgh & West Virginia Railcommon. The company description is:


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Pittsburgh & West Virginia Railroad (the Trust) is a real estate investmenttrust organized for the purpose of acquiring the business and property of asmall leased railroad. The railroad was leased in 1964 to Norfolk andWestern Railway Company, known as Norfolk Southern Corporation

(NSC). The Trust's business consists of the ownership of the propertiessubject to the lease, and of collection of rent thereon. The properties leasedto NSC consist of 112 miles of main line road extending from PittsburghJunction, Ohio, through parts of West Virginia, to Connellsville,Pennsylvania and approximately 20 miles of branch lines and real estateused in the operation of the railroad. The Companies businesses are leasedto NSC for 99 years, with unlimited renewals on the same terms.

PW GAINED 12.2% in the downturn, gained 1.3% in the upturn and hadtotal roundtrip gain of 13.7%. Also pays a dividend of 5%. Not muchchance for AFFO and/or dividend growth on this one. It is very small with

a $15 million market cap and 1.5 million shares in float.

c. Approach 3: Find REIT preferreds with the following characteristics:i. Still paying and current on the dividend

ii. Has not fully recovered in price compared to before the downturnbegan. i.e. the Risk Premium is higher now that before thedownturn.

iii. The common is still paying a dividend, although it might havebeen cut.

iv. Do not consider absurdly high, too good to be true dividend yields,like are available on BEE*, RAS* and SFI*. These have currentyields >20% and are too speculative to consider.

The companies left with these characteristics are sick; otherwise thedividend yield would not be elevated. The goal is that they will recoverand achieve the same Risk Premium they once had. A secondary goalwould be that this recovery would be able to overcome a generalized dropin the REIT preferred market. This is far from certain. Obviously, youwould need to carefully consider the company fundamentals to get yourown opinion of whether the company will recover or not. Once again, mychoices are all based on purely looking at prices, yields and Risk Premia.The choices are:

v. DDRPRI currently paying a 10.1% dividend.vi. LXPPRD currently paying a 10.3% dividend.

vii. GOODO currently paying a 10.1% dividend.Once again, I want to emphasize that I would NOT buy any of these six picks in the realaccounts that I manage with the limitation that they must be held for one year. Thesepicks are strictly for contest purposes only.


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If you have made it this far, thanks for listening:

Yodaorange

Date post:	08-Apr-2018
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Yodaorange 2010 Pick Six

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