A Moment of Silence for Fallen Put Options

The S&P 500 Index jumped more than 1% yesterday – lifting the index to within a whisker of a new one-year high. So let’s have a moment of silence, please, for the millions of S&P Index put options that have died in vain… Thank you.

As it turns out, not every sort of put option is perishing on the financial battlefield. A handful of very conspicuous stocks and indices are refusing to join the S&P on its march toward new highs. Most financial stocks have slumped about 5% from the highs they hit on October 14. Citigroup (C) and Bank of America (BAC) are both down more than 10% since then. Likewise, the Dow Jones US REIT Index has been slipping over the last few trading sessions, even though the S&P has been inching higher.

Is this divergence just a temporary “stock market thing,” or does this divergence reflect a very real “Main Street thing.” Dan Amoss, editor of the Strategic Short Report, believes it is the latter…and he said as much in yesterday’s 5-Minute Forecast

“The upcoming third-quarter earnings reports from real estate investment trusts will not be pretty,” writes Dan Amoss, whose Strategic Short Report readers are currently betting against the REIT rebound. “Second-quarter earnings for the sector were boosted by one-time gains from buying back publicly traded bonds at discounts, and taking advantage of bond investors’ newly whimsical attitude toward credit risk by floating new bond issues. Earnings were also boosted as REIT executives slashed property operating and maintenance expenses. But that can only go so far before real estate quality becomes an issue. The competitive environment to fill vacant space will squeeze REIT profits. If you’re a high-quality tenant, it will be a ‘buyers’ market’ for years…

“The Dow Jones US Real Estate Index has tacked on a hefty 30% rally since second-quarter earnings season in July. REITs are now priced for perfection, rather than being priced for the obvious multiyear depression staring REIT owners in the face.”

By Eric Fry

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