Wed June 8, 2011
This week I mentioned the importance of reading the WSJ for clues as to what is going on as well as for context in understanding accounting.
Here is a good example that requires accounting critical thinking. I also mentioned that reading the Money and Investing Section was perhaps the best source of accounting and finance knowledge.
Oo today's page C 1 Office Owners Seek to Cash In. This article details that 'owners of big name office buildings' are putting them up for sale to exploit surging prices before it is too late.' They are hoping to cash in on 'boom era prices paid by yield hungry investors discouraged by low dividends and interest rates.'
Well didn't we see this picture before in 2007-08 with the rush to mortgages?
Now turn to page C11 in the very same section.
REIT's Week to Party. This article details that REITs have turned in great results the first months up 14%.
REITs are up because of a flood of investor money into them. An REIT is a mutual fund of real estate which pays dividends from its net cash flow. Okay now which group is correct. The Office Owners seeking to sell their buildings, or the REIT investors that are effectively bidding up the prices of these properties?
My bet is that the insiders are always right. The owners of the buildings are seeking to sell at high prices. As is typical of the last hurrah in a market investors always make the mistake of chasing yield, and buying at the top of a market.
Which reminds me, Junk Bonds are getting weaker. REITs are a sophisticated Junk bond. Once the rentals fall the dividends fall. I worked for Century Development in Houston, TX in 1973. Century could not attract renters to a downtown office building to save itself. Once it is clear the economy has turned the values of REITs as in 2008 will collapse.
A related article by the way reports that more municipal bonds are being offered. The similarity is that municipalities like the owners of the buildings want to raise all the money they can while the time is right.
Meredith Whitney's latest take on municipal bonds is here. Ms. Whitney up ended the muni bond market last November with a prediction of widespread defaults. Now she is back with more evidence.
Faded Malls Leave Cities in the Lurch is a perfect example of what she is describing. One city that issued bonds to finance a mall now has such low sales tax income paying the bonds off is in doubt.
In Michigan the Governor suggests eliminating some of the 1,773 municipalities. This of course is exactly the problem, massive overhead that is duplicated over and over for no good reason.
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