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Monday, August 23, 2010
In the past few months, Growth Stock Wire's publisher, Stansberry Research, has received a tremendous amount of feedback on our "Black Market Income" idea.
This strategy is about avoiding conventional Wall Street income investments... and looking "off the beaten path" for high-yield opportunities.
In today's essay, I'm going to demonstrate why these ideas are so useful... by showing you one awful chart of a popular traditional income investment: commercial real estate.
Every now and then, commercial real estate makes a great income investment. Nine years ago, real estate investment trusts (REITs) traded for around book value and yielded around 8% on your money. It was a perfect time to jump into them instead of overpriced tech stocks. Nowadays, they're hardly a good deal...
With over $2 billion in assets, the major commercial real estate fund (IYR) is one of the largest and most liquid ways to own a basket of America's biggest commercial real estate stocks. Its trailing 12-month yield is around 3.5%. And it sells for 2.7 times book value.
Below is a chart of IYR... As you can see, this fund has enjoyed a tremendous 100% rally off its early 2009 lows. But in the past few months, this uptrend has stalled... And it's locked in a terrible trend of "big money selling." Let me explain...
At the bottom of our chart is a series of red and black vertical bars. These bars represent the trading volume on a given day in the IYR. Red bars represent the trading volume on days the market declined. Black bars represent the trading volume on days the market advanced. The taller the bar, the greater the volume.
After enjoying a weak-volume rally in March and April (A), the IYR suffered a big selloff on massive trading volume in May (B).
This huge selloff has been followed with a bearish series of "lower highs and lower lows." Rallies now come on tepid volume and declines come on higher volume... including the recent selloffs in August (C). This tells us there is no real buying power interested in this asset. The path of least resistance is down.
More than any other kind of investor, the income investor must obsessively focus on risk. He can't suffer large losses that erode his ability to compound or generate current income.
Right now, commercial real estate has plenty of risk. A sluggish economy suffocates demand for office space, shopping malls, and hotels. It squashes any rental hikes that might beef up a measly yield. Considering these risks, and IYR's ugly chart, it's a no-brainer to avoid conventional REITs right now.
If you're after income, there are far better risk/reward situations in the market. Take a look at other ideas, like mortgage REITs, covered calls on precious metals, or blue-chip dividend growers. All offer much more safety... and more attractive yields.
Tech trends are still healthy... Salesforce, Intuit, and Akamai surge to fresh 52-week highs.
Fear index shows limited panic... VIX still 40% below where it was three months ago.
...But investors are still piling into Treasurys, sending 10-year yields to 17-month low (just 2.57%).