Wrap Up Post from Yesterday

1. The broad market portfolio was up yesterday against a mixed market. Big movers included:

  • Industrias Bachoco [IBA], which acquired a smaller rival Mexican chicken producer for cash.
  • ABN Amro [ABN], which might break up into smaller pieces. Excellent idea!
  • and Valero Energy [VLO], the largest refiner in the US.
  • Also Cemex [CX] and Grupo Casa Saba [SAB]… the Mexican market is hot.

2. Howard Simons is one of my favorite columnists over at RealMoney. Yesterday he had a mea culpa over an article he wrote on equity REITs. If Howard needs to do a mea culpa, I guess that I do as well. I’ve thought that they were overvalued for some time, though not enough so to short them. Howard ended his article with, “At some point, the price of REITs will rise to a point where they no longer make sense. We have yet to see firm technical signs of higher prices being rejected, though, so we must conclude the uptrend remains intact for now.
I agree that we should honor the momentum; that said, I don’t think there is much farther that equity REITs can run; the yields are at a record low versus the 2-year Treasury yield.

3. I wish Jim Griffin posted more at RealMoney. I really enjoy his weekly posts. I think he is dead right on his post yesterday where he thought the demise of the carry trade was the biggest global risk. That’s why I am moving my bond positions to lower yielding currencies.

Also, he commented, “Is there a law of conservation of risk? Perhaps there should be, one analogous to the laws of conservation of matter and energy, which Einstein assures us can be neither created nor destroyed. It is pushing the point to declare a scientific law, but, akin to the transference between the states of energy and matter, when risk is seen to be suppressed in the macro economy, it tends to be transferred into financial markets.”

There is such a law. Risk can’t be eliminated from the system, except to the extent that parties for one reason or another naturally want the opposite side of a trade. The best example I can think of is the swap market, where some parties naturally want floating, and others want fixed.

4. Not to dis James Cramer, but the Fed doesn’t care about mortgage REITs. It only cares about depositary institutions under their purview. If a mortgage REIT goes bust, it just means that a non-bank lender is gone, thus strengthening the Fed’s hold on monetary policy.

Long VLO SAB CX IBA ABN