Reits, Gold, Oil and A Dead Cat Bounce

By Jennifer Bawden
December 5, 2008

So where do we stand now?

Many people are calling this the bottom. It does look like the market wants to rally. As everybody keeps reminding me, there is a lot of money on the sidelines.

Yes, despite choppy days, that big bear market rally could be just around the corner. If and when it does come I don’t think it will go above 11,300 on the DOW and probably won’t go above 10,400 (both technical resistance points.)

That is until the unprecedented great inflation of our dollar kicks in.

On the downside there is support at 7,197 (the 2002 lows.) You have to go back to 1998 to find a low of 7640 and a low of 6526 in 1997. It is important to remember that massive credit inflation was already in full swing in the 1990s.

It seems that some REITs held up well during these last stormy months. A number of articles are touting REITs as a safer play. I couldn’t disagree with them more. It takes time for stores to go out of business and I believe the time will come where their bottom line is significantly affected. When customers that sign 10 year leases can’t pay their rent and there are no new occupants to fill their space the dominos will fall.

Like in the early 80’s, commercial real estate will be hit hard. The way to play this is through the ETF SRS that shorts commercial real estate. If the market rebounds as we think it might, the SRS will fall giving us an excellent opportunity to load up. (I have doubled my investment twice using the SRS and just started buying back in this week at $122.)

In September of this year it had a low of $65.01 and the high was $295. It is currently at $118 and dropping quickly. Somewhere between $70 and $85 there will be an excellent buying opportunity.

After the bulls race ahead and the next market down cycle ensues, I believe we will have the chance to double our money on this stock. (I found it interesting that on Bloomberg yesterday the SRS was the most bought ETF, at least some smart hedge funds are loading up.)

If the big bear market rally comes in as expected, two other ETFs worth taking a look at are the TZA (small cap bear with 3x leverage) and the FAZ (financial bear with 3x leverage.) If the DOW opens above 10,000 and I am still fundamentally bearish these will be at the top of my shopping list for profits on Mr. Market’s next leg down.

As for oil, I had been waiting for it to drop below $50/barrel before looking at my list of MLPs (Master Limited Partnerships.) These consist mainly of pipelines that throw off great dividends. Even though it looks like a great time to buy some of these beaten down MLPs at a bargain price here is my hesitation.

As the dollar continues to rise and short term it looks like it will, oil and gold could fall further. It helps to put things in perspective. When you reflect back on the year 2000 the average yearly oil price was only 27.40. In 2001 it was 23.00, 2002 was 22.01, 2003 was 27.69 and it only jumped to 37.41 in 2004 with a little help from the US invasion of Iraq.

As the rush to pay off dollar denominated debt continues and as investors flee to the safety of US T bills the dollar could continue its short-term rise. I am going to hold off on oil (and gold companies for that matter) as they could still be pushed lower by the upward strength of the dollar.

Sometime between the middle and end of 2009 when the tsunami of liquidity being pumped in to the system by the Fed meets the deflation dragon head on I believe oil and gold will soar.

When the dollar starts its fall it will be swift and deliberate. Lower oil and gold prices and lack of credit have substantially lowered both production and exploration. Less supply combined with a falling US dollar will light a fuse beneath these two commodities.

Jen Bawden

Jen is a best-selling author and serial social entrepreneur passionate about disruptive technologies, with a decade of experience in Homeland Security technology solutions. She is also a contributing author at Seeking Alpha, a top financial news site, and a member of several think tanks including: The Aspen Institute, TED, The National Committee on American Foreign Policy, Renaissance Weekend, Summit Series, Task Force on National & Homeland Security, & Secure the Grid Coalition.