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This market is turning into the most intricate Rube Goldberg machine the world has ever known.
First, it's inflation running wild to get the ball rolling.
Then, JPOW and his band of Fed heads hit the dominos with rate hikes, time and time again.
Next, we see long-term bonds that the banks are holding fall over the edge of the table, causing our financial institutions to start to collapse...
Well, the next stop on our way to the payoff of a true market bottom is the real estate market.
We are starting to hear more and more people tell us about the "systematic risk" of this sector.
The reason for this is that it's an additional arm of the financial sector. Let's be honest, the people at the top of the real estate market are not using cash to get into new projects, they are leveraging their current properties to grow their empires.
This is where the crack in the foundation is the weakest...
You can go out and see the debt-to-equity ratio of some of these companies and see that leveraging the debt in their current holdings is the most valuable tool in their kits.
The only thing is, we are coming out of a period of interest rates that made this tactic seem like an infinite money hack - as the kids would say.
But now, the Fed has thrown a wrench in their plans, and the chickens are coming home to roost.
In the next three years, there is $1.5 TRILLION in CRE loans that will be maturing during a period where interest rates are high.
That means that the people holding those loans are either going to need to pay up or refinance. In either scenario, they will be paying substantially more than they were in recent years.
Everybody from the owners of the empty storefronts in your local mall to the storage facility where you shove everything you can't fit in your attic.
But really, can you afford to get rid of the VHS recording of that Steelers-Ravens game from 1996?
Of course not, and you have a set price to keep that locked away, and the company knows it is getting that money.
Where it starts to get sticky for the company is when its overhead costs go up and revenue stays the same.
Heck, even the revenue for a lot of these companies is getting hit, as they carry the cost of brick-and-mortar stores when people are shopping in person less.
Or corporations that are bearing the cost of empty office buildings as employees are opting to work from home more than ever before.
The only way this gets better for the people holding the debt in these locations is if the Fed starts to cut rates - and in a hurry.
Even interest rates staying the same does nothing for this situation because they will still be refinancing at a high rate. They need a full-blown pivot.
But here's the kicker...
Just because they're in a position that could cost them dearly doesn't mean that you need to suffer with them...
We see this coming in advance and will be monitoring the sector heavily to capitalize on the extreme movements that are bound to come soon.
To effectively monitor this sector, you'll want to watch IShares US Real Estate ETF (IYR) closely...
Currently down 3.3% for the year, IYR continues to be in a firm decline.
The last time we saw a drop of this nature, we were just starting to hear about empty workspaces and companies opting for a work-from-home or hybrid-work model.
This gives you a bit of perspective on the real estate market and understanding that it was already in trouble, even before these huge spikes in overhead costs hit the table.
But just as with any ETF, IYR is comprised of specific companies.
In this basket of stocks, there are 21 companies that makeup 65.5% of IYR, and here they are sorted by weight:
These are the most heavily weighted stocks on the IYR - or the tail that wags the dog for the real estate market.
You might even recognize some of these names. But soon, many of them could just be a relic of the past...
Of course, the ones in green are just storage. Just like that Ravens-Steelers VHS, you'll always have stuff that you need to squirrel away and deal with another time.
But the ones that I want you to watch closely are Realty Income Corporation (O) and Simon Property Group Inc. (SPG).
Something to note about each of these companies is they also fall into the retail space, which I already explained contains plenty of weaknesses as people start to pull back on their spending.
If you want to trade these two companies, remember you need to trade for the trend and NOT the day.
These stocks will see volatility ahead of earnings, but you can't let that affect your trade. Buy the time and give yourself some space to let it come to life.
For O, all of the moving averages are showing a negative trend, and there is plenty of open interest in the April expiration at the $60 level. But again, there isn't much time there.
When you go out to the many options, the peak open interest goes even lower, showing the market is beginning to lower its expectations. As a result, this stock is likely going to retest its lows from October and make its way to $55 over the next four-to-six weeks.
As for SPG, this stock just broke below its 200-day moving average, and when you zoom out and look at the monthly chart, you'll see that the 20-month moving average is rolling over. If this stock breaks below $100, you'll likely see a 20% drop follow in lockstep.
This is still a developing story, so be sure to watch your inbox and join me on the morning show so we can follow the markets as this unfolds. It'll be a slow burn, but the payoff will be massive.
Talk soon.
The post Commercial Real Estate is Feeling the Aftershocks of the Financial Crisis appeared first on Penny Hawk.
About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.