Skip to main content

Do Charge-off Rates impact the UltraShort Real Estate ETF?

You may have noticed today that the ProShares UltraShort Real Estate ETF (SRS) was up strongly Monday (3/16/09), tacking on almost 16%. This is far in excess of the 4% that the UltraShort Financial ETF (SKF) rose.

What gives?

It could be that investors are beginning to realize that the situation in commercial real estate is becoming worse than what we have seen in residential real estate. The Fed provides the data from which we constructed the following chart. It contrasts the charge-off rates for residential real estate loans and commercial real estate loans.

Real Estate Charge-off Rates
Whereas it looks like charge-offs in the residential sector are beginning to moderate, it appears that charge-offs in the commercial sector are really taking off, increasing rapidly and surpassing the rate for residential loans. As of the end of the 2008-Q4 there was no moderation at all in the slope of commercial loan charge-offs.

Many financial institutions have seen their stock prices decimated when mortgage-backed securities (MBS) imploded, typically due to the underlying residential mortgages going through delinquency, foreclosure and the charge-off process. It stands to reason that banks facing these levels of charge-offs for commercial real estate will be under further pressure. Banks will be running into problems not only with the actual loans but also due to the decline in value of commercial mortgage-backed securities (CMBS).

With all this turmoil in the commercial real estate sector, it is quite reasonable to assume that real estate investment trusts (REITs), which almost universally are concentrated in commercial real estate, not residential, are feeling the impact in a big way. Projects are left incomplete, properties go into receivership, write-downs occur, etc. This is bad for investors in REITs but good for anyone who owns an inverse real estate ETF like SRS.

Chart of SRS, 03-16-2009
This rally we have seen over the past week drove SRS down from over $100 to almost $60. This may turn out to be a pretty good buying opportunity for SRS. It appears the bear has further to run in the commercial real estate sector.

Disclosure: small position in SRS


Popular posts from this blog

Brazil - in a bubble or on a roll?

A couple of years ago, no one recognized the real estate bubble even though it was under everyone's nose. Now, analysts and bloggers are seeing bubbles everywhere they look. One of them, they say is in Brazil whose Bovespa stock market index has doubled in the last 12 months. Does the bubble accusation hold water? I don't think so and here are 7 reasons why Brazil is by no means a bubble economy: Exports have held up over the past year thanks to demand from China for Brazil's soya exports and iron ore. This was helped by the the Brazilian government's drive to improve trade links with Asia and Africa. Export diversification, spurred by a more active trade policy and increased focus on "south-south" trade under current president Lula, helped mitigate the decline in demand from OECD (Organization for Economic Co-operation and Development) countries A "sensible" economic framework has been in place since the 1990's. This has included inflation

Unlock Stock Market Profits - Key #1

This is the first in an ongoing series of articles where I discuss what I feel are keys to successful investing. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) There are two basic steps to investing. First, you need to find stocks that seem to have some potential. Then you have to determine whether these stocks are actually good investments. There are many stocks that at first glance look interesting, but further research reveals that there are too many negatives to warrant taking a position. This first post in the series starts at the beginning: getting good investment ideas. Key #1: If something special is happening to a stock, it will be reflected in some kind of unusual activity in the markets. As individual investors, we will never be the first to know; however, unusual activity can be an early sign that allows us to follow the Wall Street professional

Unlock Stock Market Profits - Key #4

This is the fourth article in a series of posts describing 10 tools to help you identify and evaluate good investing ideas. It is based on a post that provides a summary of the ten keys that individual investors should use to identify profitable stock trades. ( Click here to read the original post ) With this fourth post, we will continue another step along the path of finding stocks that seem to have some potential. The first post in the series discussed how to use unusual activity to identify investing ideas. The second post described how to use stock screeners. The third post described how to use lists of new highs and new lows. This post will focus on identifying social or business trends in order to find investing ideas. Information on new trends might turn up anywhere. In conversation with friends or business associates, in newspapers or magazines, on TV or though your work. The key is to be aware of trends and how they start, stop or change. We'll start by describing what