Real estate stocks' run may be near an end
REITs surge despite jitters over commercial property; analysts debate outlook

BOSTON (MarketWatch) -- Talk about climbing a wall of worry. Real estate investment trusts have doubled since early March despite persistent warnings from the Federal Reserve and economists that commercial real estate could be the next big shoe to drop in the financial crisis after the residential housing bust.

During the market's seven-month climb, riskier sectors that fell the hardest during the sell-off have posted the sharpest gains, and that's certainly been the case for REITs. The group, which gives individual investors a way to participate in commercial real estate sectors such as offices and apartments, has risen 30% over the past three months.

Many Wall Street analysts say the sector has climbed too far, too fast. REITs face multiple economic headwinds as the U.S. tries to shake off the recession. The market for commercial mortgage-backed securities is in shambles, rents and occupancies are weakening, and tenants are feeling the chill of the economic downdraft. Property values are down, and delinquencies and defaults are rising.

Mall giant General Growth Properties Inc. was forced to file for bankruptcy in April when it couldn't refinance its crushing debt load.

"We have a cautious outlook on the space, as the recent sector rally is ahead of fundamentals -- we expect further economic headlines that will pressure shares," said Stifel Nicolaus & Co. analysts.

On the positive side, some of the stronger companies have even been able to tap the markets for fresh capital during the rally, and dividend yields are attracting some income-hungry investors.

Many REITs, though, have been forced to slash dividends during the market carnage, and some have resorted to paying out stock rather than cash. But Stifel thinks the sector's yield has bottomed out.

"REITs have bolstered their balance sheets, as the capital markets began to thaw in March," the analysts said, adding the sector has completed nearly 60 equity raises since the middle of March, improving the survival odds for overlevered REITs. "Some issuances were purely defensive and destroyed shareholder net asset value, and will weigh on future earnings growth."

The outlook for commercial real estate remains bleak and the Fed has been trying to prop up the market for commercial mortgage-backed securities. Federal Reserve Chairman Ben Bernanke has been warning that defaults in commercial real estate are one of the most serious challenges facing the U.S. economy.

REITs were one of the hardest-hit industries when credit markets went into cardiac arrest last year, and the sector is closely tied to the health of the overall economy.

Despite the recent bounce, the SPDR Dow Jones REIT ETF was still off 29% for the year ended Sept. 30. The exchange-traded fund was lagging the S&P 500 Index by nearly 22 percentage points, according to investment researcher Morningstar.

The ETF's top holdings are bellwethers such as Simon Property Group Inc. , Vornado Realty Trust , Public Storage Inc. , Boston Properties Inc. and Equity Residential . The fund's dividend yield currently tops 4%.

"The credit crisis, in particular, has shaken the foundation of REITs," said Morningstar analyst Scott Burns in a profile of the fund. He said the companies are "highly leveraged and have little cash on hand" because they're required to pay out at least 90% of their annual earnings to shareholders as dividends.

"REITs are currently enduring the perfect storm: a lack of credit and weak economic fundamentals," Burns said. "Even lenders who have the capacity to make loans are skittish to do so, given worsening economic fundamentals and deflating asset values."

Late 2008 and early 2009 was simply a disaster for REITs as the companies found themselves shut out of capital markets -- the sector lost a third of its value in the first quarter of 2009 alone. ...

Some analysts tracking the REIT sector are advising investors to take the money and run after the powerful rally. ...

Fees. Fees. And more fees. With the stockmarket recovery, Wall Street is, once again, creating new product -- whose sole aim is to part you and me from fees. Say NO loudly.

Why Google will go higher, yet:

Google (GOOG) accounted for 71.08% of all US searches conducted in the four weeks ending Oct. 3, 2009, while Yahoo (YHOO) Search, Bing and Ask.com received 16.38%, 8.96% and 2.56%, respectively, according to an analysis by Experian Hitwise.

Despite a significant challenge from Bing since the alternative search engine’s introduction in June, Google’s share of search increased 1% over August 2009, when it stood at 70.24%. And while both Yahoo and Bing together account for 25% of US search share, Yahoo saw a decline of 3% vs. September, while Bing’s share slid 5%.

The remaining 52 search engines in the Hitwise Search Engine Analysis Tool accounted for 1.04% of all US searches.

Don't even think about using Microsoft's Bing. It's semi-useless.

The End of Easy Money and the Renewal of the American Economy. Review of new book by Peter S. Goodman. From weekend reading:

The delightful motif that enlivens Peter S. Goodman’s otherwise sobering new book on economic delusion suggests that we’ve been living in Neverland. The fairy dust of easy money — heedless borrowing by homeowners and investment bankers alike — has lost its magic, and now we have returned to harsh reality.

Goodman, a national economics correspondent for The New York Times, doesn’t go so far as to match literary characters with real-life figures, but clearly the former Federal Reserve chairman Alan Greenspan would be his Peter Pan: the fantastical flying boy who wouldn’t grow up to confront the adult world, where his theory of pristine, self-correcting markets simply doesn’t work the way he wishes it would. If Greenspan is Peter, then his band of Lost Boys who live with him in Neverland would include the current Fed chairman, Ben Bernanke, and the chief White House economic adviser, Lawrence Summers. Unless our Lost Boys imitate their literary counterparts and return to the gravity-bound world, we could face further rounds of economic disaster.

Goodman, a fair-minded reporter and a clear writer, demonstrates how both Bernanke and Summers, along with most other major economists and Wall Street plutocrats of the past two decades, became entranced by the Greenspan-­Chicago School notion that financial institutions can be trusted to police one another in the absence of rigorous government oversight. Summers opposed the regulation of credit derivatives during his years in the Clinton administration, helping to open the door to the reckless trading and lending that brought Wall Street to its knees. Bernanke failed to appreciate until way too late that the subprime housing bubble would not necessarily deflate on its own.

Greenspan, in one of history’s most galling now-you-tell-us moments, confessed last October that his magical thinking had turned out to be false. Thankfully, he’s gone from the public stage. Bernanke and Summers remain in positions of tremendous influence, and they have failed, so far, to articulate specifically just how wrong Greenspan was, and how they intend to reshape the worlds of banking and financial regulation. The Obama administration’s initiative to stiffen the spine of the Securities and Exchange Commission and curb derivatives speculation is apparently losing momentum. Goodman’s book reminds us that this situation contains the seeds of future fiascoes.

Drawing on his experience covering the technology industry as well as broader economic trends, Goodman performs a tremendous service by showing how the context of market manias changes but the essential content remains the same. The tech boom of the late 1990s gained dangerous momentum when financial seers reassured investors that traditional rules — companies ought to make profits derived from real demand for their goods and services — no longer applied. Crash! More recently the fallacy was that home prices would rise forever, defying the conventional relationship between supply and demand. That’s why banks gave anyone a mortgage, and Wall Street bought those mortgages and turned them into an endless stream of bonds. But when real estate inevitably collapsed, the mortgages went sour, the bonds turned noxious, and, well, here we are.

Some economic indicators are pointing in hopeful directions these days. But we could still see a painful reversal, especially when all those booby-trapped mortgages punish borrowers with interest-rate jumps over the next year. To date, lenders have deftly resisted pressure from Washington to revise the bulk of shaky home loans, heightening the risk of a worsened foreclosure crisis that could drag the larger economy back into recession before we ever reach a solid recovery. Wall Street, for its part, defiantly insists that derivatives trading should remain beyond the reach of the financial police. We desperately need the Lost Boys to wake up and deal with the truth.

Washington bashing has become super fashionable. From the latest issue of Fred Hickey's High-Tech Strategist:

The cable television viewership audience for Fox News has been growing at double-digit rates according to Nielsen Media Research. CNN, MSNBC and even CNBC are losing viewers. Fox's government-bashing slant has resonated with an ever-growing audience. The latest Nielsen ratings for prime time found that Fox's programs attract an average 2.5 million viewers, more than all the viewers of CNN, MSNBC, CNBC and CNN-Headline News combined.

Fox's Glen Beck's show's audience (three million viewers) is now five times larger than CNBC's Chris Matthews "Hardball" and ten times larger than CNBC's "Fast Money" show in the same time slot.

Magazines are ultra-cheap these days. But you mustn't ever:

1. Sign up for automatic renewals -- where they build your credit card until eternity.

2. Renew with the form they send you. My wife got a renewal from Cook's magazine. Price $24.95 a year. In the same mail, she received "a special charter rate" subscription offer for $19.95.

Cheap BusinessWeek subscription. Only 60 cents an issue delivered. Click here.

Presents for your grandkids. Playgrounder is a web magazine helping parents and kids find the very best stuff. Our team digs up the best toys, games, gear, clothes, DVDs and more. New items are posted daily. playgrounder.com/

Norway is the Most Desirable Place to Live. The UN’s Human Development Report 2008/2009, done annually, ranks Norway numero uno because of the country's human development index ratings, which evaluates certain criteria, including educational factors, gender equality, and life expectancy. Australia comes in number -- followed by Iceland (last year's number one), Canada, and Ireland. .

Meantime National Geographic rates Norway as one of "Our Best New Trips in the World." Click here. Watch last night's 60 Minutes piece on The Birdmen, shot in Norway (where else?).

How to make Windows XP startup faster: Some useful tips at WikiHOW. Ignore the tip on Hibernation. Don't do it. Too dangerous. For more tips, click here.

Favorite lesson. To my brain, this is more about today's economics than school-taught geometry:

Bad timing.

Two guys are drinking in a bar. One says: "Did you know that Moose have sex 10 to 15 times a night?"

"Awshucks..," says his friend, "I just joined the ELKS...!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.