{"id":38680,"date":"2013-05-31T10:38:04","date_gmt":"2013-05-31T14:38:04","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=38680"},"modified":"2013-05-31T10:38:04","modified_gmt":"2013-05-31T14:38:04","slug":"is-the-bull-market-in-reits-and-mlps-over","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/05\/31\/is-the-bull-market-in-reits-and-mlps-over\/","title":{"rendered":"Is the Bull Market In REITs and MLPs Over?"},"content":{"rendered":"

By The Sizemore Letter<\/u><\/a> <\/p>\n

Over the past 10 days, a period where the S&P 500 has traded sideways, REITs and MLPs are down 8% and 6%, respectively, as measured by the Vanguard REIT ETF ($<\/span>VNQ<\/a>)<\/strong> and the JP Morgan Alerian MLP ETN ($<\/span>AMJ<\/a>)<\/strong>.<\/p>\n

\"Chart\"<\/a><\/p>\n

Individual REITs and MLPs got hit harder.\u00a0 The popular Realty Income ($<\/span>O<\/a>)<\/strong> and Martin Midstream ($<\/span>MMLP<\/a>)<\/strong> were down 15% and 10%, respectively.<\/p>\n

Ouch.<\/p>\n

All of these securities have one thing in common: they have become extremely popular with yield-starved income investors in recent years.\u00a0 And the Fed\u2019s recent pronouncements\u2014which indicate that quantitative easing may be ending sooner than expected\u2014slammed them in response.<\/p>\n

So is that it?\u00a0 With rates now destined to rise, is the bull market in income-focused securities over?<\/p>\n

Not so fast.\u00a0 To start, it is not entirely certain that interest rates will materially rise.\u00a0 Sure, we probably won\u2019t see the 10-year note at 1.5% again (or mortgages at 3.3%).\u00a0 But as the experience of Japan has proven, rates can stay much lower for much longer than anyone expects during a prolonged period of deleveraging and aging demographics.<\/p>\n

The U.S. is not Japan, of course.\u00a0 But we have a supply\/demand mismatch in the fixed income market.\u00a0 Supply of fixed income from government and private-sector borrowers has not kept up with demand for fixed income by retiring Baby Boomers.\u00a0 Putting it another way, there is a surplus of investable funds out there, and that surplus means that the price of money\u2014i.e. interest rates\u2014will likely stay low irrespective of what the Fed does.<\/p>\n

In other words, don\u2019t expect to see 4-5% Treasury note yields any time soon.<\/p>\n

But beyond this, even if yields do rise modestly, a well-bought portfolio of REITs and MLPs can offer something that a standard bond portfolio cannot: an income stream\u00a0that rises over time.\u00a0 With demand for pipeline infrastructure charging ahead and with the U.S. commercial real estate markets continuing to improve, the fundamentals of REITs and MLPs as a group are strong and looking to get stronger.<\/p>\n

That said, investors had gotten a little carried away this year.\u00a0 Realty Income and Martin Midstream had been up by as much as 35% and 45%, respectively, since January 1.\u00a0 They needed a correction\u2026and they got it.<\/p>\n

Where do we go from here?<\/p>\n

I continue to like both REITs and MLPs as asset classes for the next 5-7 years.\u00a0 But it\u2019s never good trading advice to try to catch a falling knife.\u00a0 I would recommend averaging into your favorite REIT and MLP shares on any additional weakness.\u00a0 You don\u2019t have to buy your entire target allocation in one trade;\u00a0 buy on dips to enjoy a lower cost basis and plan on holding for a while.<\/p>\n

If I\u2019m wrong\u2014very wrong\u2014and inflation goes through the roof in the years ahead, REITs and MLPs will take a hit, at least initially.\u00a0 But both also have a degree of built-in inflation protection in that real estate and pipeline assets should hold their value in real terms even while the debts used to finance them get inflated away.<\/p>\n

Disclosures: Sizemore Capital is long O, MMLP, AMJ and VNQ.\u00a0 This article first appeared on TraderPlanet<\/a>.<\/p>\n

SUBSCRIBE\u00a0<\/b><\/a>to\u00a0Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

\n

Related posts:<\/p>\n