We are all grieving over the loss of "upward only" lifestyles and the David Copperfield-style disappearing act of our net worths and savings. Even more frustrating is that we all feel that it was not "our" screw up. We were lured into a false sense of security and aspirations of wealth accumulation by the cosmos. It just happened!!! We were all hit by a pandemic economic plague, not by sniper fire, so we are left without a rationale, reason or an understandable cause. We search the airwaves and the internet for solace and comfort. Why did it happen? Who is to blame? Is there a magic wand that might bring us back to life? We have an unquenchable thirst for information to help answer these questions. However, the ability to cheer up and get on with life does not rest in the plethora of governmental programs enacted to ease our economic pain, or in the well-intentioned commentary of pundits on the history and future of financial engineering and statistics. The solution rests in first, immediately adapting and surviving so that we are around in order to, secondly, understand what information is important and how that information is harvested.
The first objective is most easily achieved by understanding the Kubler-Ross book On Death and Dying, which outlines 5 stages of grieving:
Denial
Anger
Bargaining
Depression
Acceptance
I will save you 200 pages of reading by concluding that recovery is the amount of time required to go from Stage 1, denial, to Stage 5, acceptance. What we have learned after 30 years of investing and cyclical roller coasters is bypass 2 to 4 and go immediately to 5. In short: Get over it and get on with it!
Achieving the second objective, understanding the value of information and how to harvest it, is more complicated. Listening to the noise is often an exercise in "confusing activity with achievement." When we are stuck searching for a point of view, we bury ourselves in analysis and review of historical data and future projections. What we have learned is that history is a good foreteller of the future if you just wait long enough, and that projections of the future are simply that. More frustratingly, everyone has access to the same information. There is no longer the great arbitrage that occurs when one investor has a little bit of information that other investors don't have. If they do, it will last for about a nanosecond before being dispersed through instantaneous global communications all over the world.
In fact, the fastest growing segment of information retrievals are blogs and tweets. Why?? The most interesting aspects of global communication are the emotions and reactions of respected individuals, not the array of charts, tables and analysis. It is rather how they feel and what they are sensing that people connect with as they seek an experienced guide's footprints through the jungle. We are all looking for "principled leadership" and a road map that is using a scale of inches rather than miles.
The world is changing at warp speed and we need to focus on going to where the puck is going, not where the puck is. Wealth is created by keeping a calm mind in the midst of instability and volatility in markets that do not lend themselves to conventional analysis. Fortunes can be built by a quantum leap of technology in a garage or an industrial building. The qualifications and education for jobs in America 10 years from now will be vastly different than those for the jobs that are currently being sought by almost 10 percent of our population.
This requires a reorganization of most of our "adult" thinking. The way we look at things today is far different than even a decade ago. The information is always random and order is only gained through the rear view mirror. However, the manner in which it is harvested and disseminated and the knowledge that will be needed to turn information into action requires a change in the context of our points of view as well as the content.
There is far more important information to focus on than one more historical dissertation on the "subprime debacle" or the continuing harangue on big bank bailouts. I would like you to take the time to view the following video. I promise it will stir your thoughts and maybe even your actions. It encourages us to change the context of the way we look at where we are today. The cleansing of the old systems may simply streamline our path to the new systems. It may, in effect, be the fire on the savannah that is the key to next year's renewed growth and prosperity. When you are finished, return to me for a quick wrap up.
Wrap Up
We are in the midst of the most exciting time of the last two centuries. Market barriers are falling, local monopolies and franchises are being dismantled, the power and prowess of the old guard is being challenged vigorously by the young guard, and technology is changing every aspect of our lives every minute. Every company everywhere in the world is shoring and restructuring their balance sheets and honing their business models. These are the factors upon which we need to focus.
The deleveraging process will continue and debt and companies will be restructured better able to compete once again in the changing world marketplace.
My recommendation is to develop a simple point of view on all of the other stuff and be prepared to give it up in an instant. More importantly, we must change the context of how we develop a point of view, develop our opinions, and leverage or hedge those points of view. That global dialogue will be conducted far differently by a vast array of different players in the future and getting in front of that train is key.
My current point of view based on instincts, which I am prepared to give up in an instant:
Short-term, debt is the new equity
Long-term, oil is the new gold
Short-term, alternative energy subsidized platforms, although an appealing idea, will be the flavor of the year
Long-term, it will only reduce oil supply and increase cost of our addiction
Short-term, real estate will get clobbered on all fronts
Long-term, real estate will be the asset of choice
Short-term, most types of real estate will not be physically or functionally obsolete
Long-term, most types of income producing real estate will be functionally obsolete as technology exponentially grows and changes the way space is used
Short-term, financial stocks will have a bounce
Long-term, global competitiveness and technology will make capital a global commodity with pressure on margins and few monopolistic global franchises
Short-term, America will remain the largest and most liquid capital market
Long-term, the world will invent a truly global capital market place
Short-term, sequential sucker rallies will challenge us from the sidelines
Long-term, global commodities will prevail
Short-term, private equity will perform poorly
Long-term, private equity will outperform other asset classes and VC and technology funds will be at the top of the list
Short-term, fiscal policy will frustrate monetary policy
Long-term, monetary policy will frustrate fiscal policy
Short-term, foreign ownership of treasuries will continue
Long-term, foreign countries will demand more for their continued dedication
Short-term, we will become protectionist
Long-term, China, India, Brazil and Russia will force us back to the global expansion table
Short-term, we will take a page out of European Socialistic Policy
Long-term, American capitalist will return, having thrown away his steel sword for a laser
The simple message from these instinctive impulses is that value will now be built by creating platforms of performance and productivity and not from financial arbitrage or engineering. Financial tools will once gain be relegated to a means utilized to bolster a business end, rather than the end itself.
Now what we have learned is that all of these instinctive assumptions may change in an economic instant. The only assumption I will not abandon is the total unpredictability of the global order. There will always be "unforeseen intervening events" which will interrupt the rhythm and mood of all markets. We seem unable to accept that the world's smartest people have not been able to come up with a new slogan to explain the complexity of the current situation. Our answer is to "give up" mapping the old system and turn our attention to returning to "principled leadership" of talented people making decent and informed decisions on "true value" for the long term. This formula is infallible over time. It will not fall or fail as a result of short-term changing assumptions. It will be fueled by the wind of change. In order to transform ourselves to more conservative financial structures with more aggressive business purposes we will transition through a torturous restructuring phase which will challenge us at every level.
Restructuring Phase
If you are an individual or an equity investor, today’s mantra should be “don’t monetize into the face of a crisis.” The goal should be to fight and hold for optionality and future equity value - it will return. If you are a debt-holder, the goal should be to monetize or convert to equity and patiently await the correction. For companies and assets that are inherently sound, the conversion to equity or restructuring of existing debt may be the best option. For those companies and assets that are not inherently sound, the realization of a loss and the monetization of any remaining capital can be redeployed today at historically high spreads and uniquely conservative underwriting assumptions. (Monetization of debt will be mostly driven by availability of reserves as well as mark to market and capital regulatory issues).
The short-term will continue to be unpredictable and therein is the great opportunity as we press hard into the “Restructuring Phase.” We are in an era of “confidence shifts” – adrift in a sea of unfulfilled expectations and mistrust. Once we stop lamenting the past and accept deleveraging and capital destruction, the true restructuring process will commence. The blockage caused by untested debt instruments and ever-changing fiscal intervention will give way to new and more conservative capital structures, and a market-clearing of stagnant debt and equity once resolution strategies are allowed to clear. As the debt process redefines itself and recalibrates companies’ liabilities to acceptable levels, equity will feel confident and comfortable to reemerge with new management teams who will be hired and incentivized. Investment returns will be restored as these new businesses operate in a more efficient and trimmed down format.
When the valued old tools of experience, discipline, judgment, integrity, perseverance and commitment are added to the tool kit of a delevering global financial structure and a relevering global information and technology structure, the game is afoot.
The realization we must accept is that the game will now be played in inches and without the knowledge or concern of where the goal line may be. People need to be motivated, free from the horrors of the past and uninhibited by a possible failure of the future. The future will be determined by our continued trust and belief in people and relationships and enabling them to do what they do best. The key for all of us is to produce players not spectators – they will find the goal.
"Is this a suckers rally or the beginning of a new secular bull market and the end of a secular bear market - or is it a cyclical bull market in the midst of a secular bear market?" (I've already totally confused myself!) This is the question in the hearts and minds of us all at the moment.
Let's face it, all we really want to do is go to Auntie Em's house, snuggle under the covers and wait for the big, scary financial tornado to pass us by. Since we have all seen the movie before, we know the journey leads us back home and we should relax a little, stop being frightened and just continue the trip down the Yellow Brick Road. The Market's Wicked Witch will do all she can to derail us - from fields of poppies to Winkie soldiers. She may even send the Winged Monkeys to kidnap us. The answer is to have faith in the Wizard - the Wizard provided the Scarecrow, the Tin Man, and the Cowardly Lion with exactly what they lacked and showed Dorothy that there was no place like home. Bottom line, our government has carved in granite the surety that it will not allow us to fall into global Armageddon, yet we continue to analyze, criticize, scrutinize and rationalize why it might still happen.
It is not important whether or not this rally sustains itself or extinguishes itself. What is important is concentrating on fundamentals and putting aside the notion that we have only two options: click our ruby slippers to make everything better, or be slayed by the Wicked Witch of the West. The government will continue to provide stimulus, subsidies, bailouts, change the rule of law, increase liquidity and print more money to keep the road intact. Success will depend upon our ability to stay on the Yellow Brick Road and to not expend unnecessary energy trying to determine whether it's paint or gold.
We are not in Kansas anymore - and it feels frightening at all levels
Corporate earnings, revenues, margins and market share in most businesses around the world continue to erode. Management teams have already used their most powerful weapons of reducing costs, expenses and capital expenditures to bare bone levels and are running out of ammunition.
During this recent rally, the regulators artfully engineered a test for financial institutions to get to their desired answer. A rising market aids the banks in raising equity from the private sector instead of from the government. The tests concluded that "major banks are fine and simply need more equity." This sounded the starting bell that the government would not nationalize the banks and the equity markets felt the end of the threat of global Armageddon. This had been the biggest discount factor in the financials' values since only Nobel laureates were able to discern continually modified accounting, mark-to-market and capital regulatory conditions. Every time a bank got its back to the wall, the government simply moved the wall. The market finally got the message and a surge of equity recapitalizations hit the market, diluting existing shareholders and causing a March V-shaped recovery of epic proportions.
Were the stress tests accurate and does anybody care?
How do we interpret the current results being achieved by the large banks? Let's take a look at a quick snapshot that sheds a bit of light on the topic:
Retained earnings before write-downs are massively beefed up by the direct and indirect subsidies that the government is providing to the financial system.
The Fed Funds Rate and deposit rates are now close to zero percent. With banks having been able to borrow about $350 billion since last year at close to zero percent interest rates, given the FDIC guarantee on new borrowings, the bank can now earn a fat net interest margin that is a direct subsidy to financial institutions.
On top of this, major US financial institutions got a massive direct subsidy from the bailout of AIG by relieving their counterparty risk, which they had previously written down. When the Fed closed out the AIG credit default swaps, they did so at par. Why? To bailout the counterparties. The counterparties of this largesse were the biggest banks. The Fed decided to pay 100 percent on the dollar, which was more than double the then-current market price. In essence, this was a huge direct subsidy to the banks that were on the other side of the CDS transaction.
Overall, the US government has committed - between liquidity supports, recapitalization, insurance of bad assets, and guarantees - over $13 trillion of resources to the financial system.
The essential ingredients for a take-home test:
Providing unlimited liquidity and deposit guarantees to avoid bank runs and refinancing risks;
Subsidizing banks and their rebuilding of capital via near-zero percent funding rates and rising net interest margins;
Hoping that fiscal costs of massive subsidies and bailouts of banks are contained by a cycle of economic recovery and a restoration of confidence in the financial system;
Subsidizing the illiquid securitization markets with TALF liquidity and stimulating the separation of toxic assets from the banks' balance sheet via cheap and plentiful government leverage and non-recourse loans through PPIP. This will allow the selling banks to avoid a true mark-to-market;
Intending to purchase an additional $750 billion of MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae;
Causing a slow enforcement environment by continued competition amongst regulatory agencies such as the Fed, Treasury, and the FDIC;
Engineering the re-entry of private capital markets to recapitalize bank balance sheets by continuing to artfully adjust capital regulations between Tier 1 capital ratios and TCE ratios as well as shifting troubled assets from Level 1 to Level 3.
As a result, the current rally feels to us like a bit of a suckers rally These rallies are brutal since they force everyone back into the market, because they cannot afford to be beat by an upward-adjusting benchmark, only to leave them bloodied and muddied on continually disappointing fundamentals. The equity market has simply signaled that it applauds a change of measurement, as well as a change in fundamentals. The debt markets are not yet in agreement. No doubt this momentary surge will once again dissipate and await reaffirmation from the fundamentals themselves.
Don't listen to the noise As seen during the Great Depression, Japan's "lost decade" and most recently after the Tech Bubble, these bear market rallies are nothing new and history has shown that there can be several sucker rallies before full recovery. The Great Depression had several rallies and Japan's long recovery saw the Nikkei rise by at least a third almost four times in a little over a decade.
Sustained "V" rallies are rare and this one is driven by strange factors; poor quality dominates the market with the most heavily shorted stocks having the greatest uplift. Stocks with terrible fundamentals are up 60-70 percent while those with good fundamentals are up 20-30 percent.
We are still in the midst of a massive headwind of deleveraging which is causing huge deflationary patterns around the world. Every business is fighting for a new business model, a restructured balance sheet and has learned to live on tighter margins. However, all governments are doing all that they can to re-leverage, not deleverage the system.
There is a current shared belief that global Armageddon is not at hand and that the world will simply go through a massive recession, but not a devastating mortal depression. The world central banks have all weighed in and said they will not let this happen.
Confidence at the bottom, however, takes longer to restore. Housing, consumers, savings and unemployment are huge issues that are still in the mix. Unemployment is at highs not seen since the early 1980s. Job openings are at a record low and there is more to come, especially from the auto industry. Foreclosures hit another high last month for the second straight month, with one of every 374 households receiving a notice. All of this near-term news in most places continues to worsen. As a result, there is tremendous volatility and correspondingly there will be tremendous opportunities.
Follow the Road The rule of law has been challenged in many arenas and has been subjugated to political will. Investors around the world have found that their usual reliance upon systems of enforcement, accountability and predictability must give way to the political and social will of a regime, which will change the nature of the way capital roams through the world. Political will trumps market will and therein is the lesson that we need to learn.
The US government, in essence, now controls the financial industry, the car industry, the insurance industry, and the investment industries. The free flow of markets has been temporarily tolled. Although this may be an abusive philosophical concept to many, most other governments in the world have long since adopted this practice. Get used to it! The government will continue to create more stimulus programs, institute more subsidies, alter more industries, change the rule of law across more investment instruments, and defer the potential problems of the future to safeguard the transition of the present. As a consequence, there will be more sucker rallies, there will be more bull markets, there will be more bear markets, and the rules and direction of global capital will continue to morph and amend secular and cyclical cycles.
Moral of the story We have no ruby slippers. We cannot count on a deus ex machina in the form of outsized gains in a passive stock market. We must concentrate on hard work and realistic expectations and not rely on clicking our heels for an easy way out. As Dorothy, the Wicked Witch and the Wizard count on the magical balloon to take them to financial safety, perhaps it is better to be Toto. A dog's life on the financial Yellow Brick Road might not be that bad. They always find their way home, under their own steam and without GPS.
Kansas
One of the great privileges and thrills of my job is to lead the brilliant and dedicated young Colony professionals on the wild ride of their careers. I am constantly amazed and humbled by their focus, linear thinking, freedom from fear and analytical rigor. Even more importantly their integrity, dedication and never-ending energy are the true irreplaceable attributes of our firm.
I thought it would be most interesting to start showcasing our young talent- what they think, how they see their corner of the market, challenges and opportunities, and headlines upon which you should focus.
Amanda Black and James Gildea are two of our best and brightest young professionals, based in New York and are responsible for EDGE, a small hedge fund that we manage which focuses on global real estate securities. We spent some time yesterday afternoon pulling their hair out (since I have none left) about the cross currents in the global real estate securities market. I think you will find their thoughts quite interesting.
For context, on March 9, 2009, the RMS benchmark of US REITs was -41% year-to-date 2009 and -74% from the peak of the market in February 2007. Since March 9 the benchmark has returned +45%. Why?
Capital Raising. REITs in the United States, Australia, the UK and Singapore have raised approximately $21 billion of new equity over the past 2 months. Commencing on March 19, 29 US REITs have raised a total of approximately $10 billion, frequently in overnight offerings where the book has been at least 1x subscribed prior to the deal being broadly announced. The deals have frequently been upsized during the book-build, and the pricing discount to the pre-announcement price has ranged from 1% to 35% and averaged 8%. Merrill Lynch has been the lead underwriter for most of the offerings to date. Companies have issued from 4% to 65% of their pre-offering equity (average 22%). As of this writing, the range of post offering performance ranges from -12% to +53% and averages +7%. Thirteen of the 30 deals are currently trading below offering price and 21 of the 30 deals are outperforming the REIT benchmark. Two REITs, Simon and Host, have also recently issued new corporate unsecured bonds, raising approximately $1.6 billion. Five UK REITs (including all four "majors") have also raised approximately $5 billion of new equity primarily through rights offerings at discounts ranging from 30% to 87% and in every case the offerings increased shares previously outstanding by over 60%. These stocks are up 77% on average from the rights subscription price. It is our impression that there has been material participation by the non-REIT-dedicated investment community as the amount of capital raised seems outside the means of the dedicated community.
Valuation.A case study of Simon Property Group's (SPG), one of the best and most respected retail owner and operators, implied cap rate changes provides good insight into how public real estate securities valuations have changed over the past few years. Throughout 2006 and 2007, SPG traded at an average nominal cap rate of 6.2%. At its all-time high stock price (Feb 7, 2007), SPG traded at an implied nominal cap rate of 5.2%. At its recent low on March 6, 2009 (80% below its all-time high price and 74% below its average 06-07 pricing), SPG traded at an implied nominal cap rate of 10.9%. As of today, after rallying 99% from its March low, SPG trades at an implied nominal cap rate of 8.6% (on 2009 NOI). From its 2006-2007 levels, SPG's cumulative cap rate expansion, as measured by public market pricing, has been roughly 250 bps.
The direction and magnitude of SPG's price and value changes are typical of the global REIT universe as a whole. However, starting and ending points do differ to some extent. The average US REIT currently trades at a nominal implied cap rate of 8.8% and an EV/EBITDA multiple of 13.4x (on 2009 earnings). The UK and Europe, starting from a lower nominal yield and not yet having experienced the same magnitude of cap rate expansion, currently trade around a 6.6% implied nominal cap rate.
Based primarily on large negative share price movements, ignoring the leverage impact on asset value declines and the fact that these price declines are measured from the peak of a bubble, some generalist investor are of the opinion that real estate is the "deal of the century" (this as opposed to two months ago when the general consensus believed that half of the public REIT universe was likely to declare bankruptcy). The 3 major public hotel companies in the US currently trade at 11.5x 2009 EBITDA versus 8x, where they traded only two months ago. There seems to be a general consensus in the market that hotels are currently at trough EBITDA and prudent to own in a reflationary environment.
Will the global REIT industry require balance sheet restructuring to reduce debt and increase LTVs?
Leverage. The average LTV (using cap rates near current public implied) and the average debt/EBITDA ratio stand around 66% and 7.7x for the US REITs and 70% and 9.4x for the UK REITs. Needless to say, the LTVs range from roughly 30% for some companies to no equity value at all at a few. Aside from the Hong Kong real estate companies, which generally operate with much lower leverage, most global markets share a similar LTV ratio. Due to the recent wave of equity issuance, the global public LTV ratio has been reduced by about 200-300 bps. In the UK and Europe, the companies tend to operate with higher leverage but with longer average maturities, whereas in the US, Japan and Australia, shorter average maturities have led to the additional problem of liquidity. Debt/EBITDA at the 3 major public hotel companies is approximately 3.5x (on current EBITDA).
Who are the best and worst performers?
Dispersion and Correlation. During the rally, stocks in the sector have exhibited extremely high dispersion (the performance differential between the best and worst performing stocks) and high correlation (stocks in the sector moving in the same direction as each other as well as the market). In the month of April 2009 the average return of the top performing quintile of US REITS outperformed the bottom quintile by 100%. For comparison the same figure in April of 2008 was 15.3% and for the whole of 2008 was 68% (2007: 48%). Globally, the spread between the first and 5th quintile of ex-US property stocks in developed markets during April was 54%. The stocks which underperformed the most during the bear market leading up to the rally have been the leading outperformers during the rally. Markets around the globe have also exhibited high correlation with each other, as the "risk trade" (i.e. financials, REITs, commodities, Emerging Markets, high yield currencies and bonds) either underperforms or outperforms.
A peek into why we liked iShares…
Technical Factors. One technical factor of note in the US is the widespread use of ETFs (exchange traded funds), including those designed to provide short exposure and/or leveraged exposure to a benchmark. For example, while the average daily value traded for the IYR, the most popular long, unleveraged US REIT ETF is approximately $1.5 billion (equivalent to about 1% of the sector's equity market capitalization), the average daily value traded for the SRS, which seeks to return twice the inverse of the REIT benchmark, is approximately $950 million. A recent study by Barclays Global Investors concluded that the daily rebalancing of leveraged and inverse ETF's is always in the direction of the underlying benchmarks daily performance, creating significant daily momentum in the underlying benchmark towards the market close and exacerbating overall volatility of the sector. Anecdotally, we believe it is why we have seen many +5% days at 3pm turn into +10% days by the close. Forty-five percent of trading days in 2009 have had price movements greater than 5% (7% of days greater than 10% movement). We would also note that REITs are about a 7.5% component of the XLF, the financial sector ETF, which trades approximately $2.3 billion per day. Short interest in the US REITs dropped 15.6% during the month of April.
Fundamentals in all asset classes continue to deteriorate, but the market seems to have looked through the weakening operating results at the asset level with heroic multiples and cap rates. Does this represent the beginning of a new bull market?
Bear Market Rallies. If defined as an upward move in the market of greater than 15% during the course of a bear market, there have been 13 bear market rallies in the S&P 500 since the beginning of the Great Depression. If the March 9 rally in the S&P 500 is in fact a bear market rally, as of today it would be the fourth largest in magnitude and of about average duration. There were 6 bear market rallies in the NASDAQ index between its peak in 2000 and its low in 2002, while in Japan the Nikkei 225 experienced 4 bear market rallies of more than 30% from the time of its peak in 1989 until the beginning of quantitative easing in 2001.
Japan also appears to be filled with inconsistencies. What's happening?
Japan. Moreso perhaps than other markets, there are factors unique to Japan that has determined the behavior of Japanese property shares during the financial crisis and the rally. Japanese property companies, including JREITS, are predominantly financed with bank loans with relatively short maturities of 1 to 3 years. When the financial crisis commenced, many Japanese banks had a higher proportion of their loan books in commercial real estate than they did at the end of the 1989 bubble, creating the conditions for a significant refinancing crisis. The key factor in the performance of the JREITs has been the corporate and banking relationships of their sponsors. Thus, companies such as Nippon Building Fund, affiliated with Mitsui Fudosan, outperformed during the drawdown and have now underperformed during the rally, while New City Residential, without membership in a corporate/banking family, was forced to become the first JREIT to file for bankruptcy. Other JREITs with non-corporate sponsors have strongly outperformed during the recent rally.
Are the global markets which were not avid buyers of Wall St. originated derivatives or debt products more insulated from the current downturn in real estate fundamentals?
Emerging Markets. One point to note about emerging markets, specifically China and Brazil, is that the stocks (so far) reached their lows in October, and while they traded down in the first two months of 2009, they did not reach new lows in March, unlike the markets of the developed world. Nevertheless, since their interim lows reached in early march, the emerging market property stocks, notably those in China and Brazil, have outperformed the developed country stocks during the rally.
"Who are the buyers and why are they buying" are the lingering questions. China and Japan are obvious suspects, but hedge fund buying has also been notable. The vagaries of benchmarking are complicated and below is a brief synthesis of the tug-of-war.
Benchmarked Investing. Long-only portfolio managers typically have either contractual or policy limits on the amounts of cash they hold, typically 2% to 7%. In the sharp drawdown of the bear market, cash would have provided the only shelter available to these investors, and we believe it is likely that many managers were at or near these cash limits. However, the suddenness and magnitude of the rally has caused any cash holdings to be a significant anchor on relative performance, and we expect that as managers have fallen behind their benchmarks they have deployed this cash. In the rally, we believe the progression of buyers has moved from short-covering to quant fund unwinding to long-only catch-up and now perhaps on to momentum investors. Another feature of the benchmarks during the rally has been the outperformance of the worst performing bear market stocks, which has also meant that the smallest market cap stocks, whose value had significantly eroded during the bear market, have led the rally. For example, in one global ex-US REIT benchmark, 17 of the top 20 performing stocks in the 120-stock benchmark during April were companies with market capitalizations of under $500 million, compared to the weighted average market cap of the benchmark of approximately $5.1 billion and the median market cap of $550 million. The average return of these 17 stocks during April was 61.6%, compared to the overall benchmark's performance of +12.6%. Managers who avoided the smallest cap or most risky stocks in their benchmarks would have suffered badly in April.
You both have exhibited your vast intellectual acuity and harnessed surgical knowledge. As the final test of your brilliance, can you name which actors played the Lion, Scarecrow and Tin Man - and I don't appreciate your suggestion that I should be cast as the "apple tree."
P.S. I knew this would intrigue you. The answer is Bert Lahr as the Lion, Ray Bolger as the Scarecrow and Jack Haley as the Tin Man.
Growth Has Its Seasons May 1, 2009
My thoughts for May Day and this economy come from the Peter Sellers film "Being There":
President: Mr. Gardner, do you agree with Ben, or do you think that we can stimulate growth through temporary incentives?
[Long pause] The Gardener: As long as the roots are not severed, all is well. And all will be well...in the garden. President: In the garden. The Gardener: Yes. In the garden, growth has it seasons. First comes spring and summer, but then we have fall and winter. And then we get spring and summer again. President: Spring and summer. The Gardener: Yes. President: Then fall and winter. The Gardener: Yes. Benjamin Rand: I think what our insightful young friend is saying is that we welcome the inevitable seasons of nature, but we're upset by the seasons of our economy. The Gardener: Yes! There will be growth in the spring! Benjamin Rand: Hmm! The Gardener: Hmm! President: Hm. Well, Mr. Gardner, I must admit that is one of the most refreshing and optimistic statements I've heard in a very, very long time.
