Stocks Make Strong Comeback Despite Recent Turbulence

Stocks rebounded strongly on Wednesday in the wake of what looked, on the surface, to be a strong Consumer Price Inflation report.

In the aftermath of that February jobs report, which showed faster-than-expected wage growth, this looked like it would be a negative. But it wasn’t, as the expiration of February contracts on the CBOE Volatility Index unleashed a torrent of VIX selling, which pushed stock prices higher in an epic short-covering rally.

In the end, the Dow Jones Industrial Average gained 1%, the S&P 500 gained 1.3%, the Nasdaq Composite gained 1.9% and the Russell 2000 gained 1.8%. Treasury bonds weakened, pushing the 10-year yield up to 2.91% — approaching the 3% threshold that is widely seen as a critical level as GDP growth, fiscal largesse and inflation pressures push up borrowing costs.

The dollar was hit hard as well, with Societe Generale’s Albert Edwards worried the drop is being driven by the seemingly limitless spending being condoned in Washington by President Trump and Congressional Republicans. Both gold and crude oil moved higher.

Dow Jones

Breadth was positive, with advancers outpacing decliners by a 2.2-to-1 ratio. Troubled burrito maker Chipotle Mexican Grill, Inc. (NYSE:CMG) gained 15% on the announcement of a new CEO and hopes he can emulate the success he enjoyed at Taco Bell. At the sector level, gold miners led the way with a gain of 4.1%, while REITs were the laggards on the drag from the backup in rates.

On the economic front, both core CPI and CPI beat estimates on a monthly basis, but the annualized rates remain tepid. Core year-over-year CPI is running at just 1.8%. Retail sales disappointed as well, playing into hopes that the Federal Reserve continues to go slow with its rate hikes, with sales down 0.3% month-over-month for the first decline since September’s report on August sales.


Stocks Make Strong Comeback Despite Recent Turbulence

Volatility was intense today, with the Nasdaq up 3% off of its post-CPI futures low. The dollar and bond prices are collapsing. Gold and short volatility ETFs are soaring. The Dow Jones has now climbed above its 50% retracement of its peak-to-trough losses. And the 10-year yield has hit its highest level since January 2014.

This is short-covering, pure and simple. And a relief for risk parity funds that depend on stocks and bonds moving in opposite directions. As long as stocks can keep rising to offset T-bond weakness, the show can go on.

But once higher yields start to bite economic growth and earnings growth expectations — driven by the inevitability of higher inflation — we will see a repeat of the recent market unpleasantness.

My guess is we have a couple of months, at least, before that happens. Until then, the volatility meltdown is creating a number of new trading opportunities. Including the nice gain Edge Pro subscribers are enjoying on their iPath S&P 500 VIX Short Term Futures TM ETN(NYSEARCA:VXX) puts.

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Buy This Stock Profiting From Out of Control Government Spending

To avoid near term chances of a government shutdown, last week the U.S. Senate and House passed a two-year spending plan, which the President signed. The new plan significantly boosts government spending over the next two years compared to the previously in effect sequestration plan. No matter what your thoughts are on the big vs. smaller government debate, the fact is that government spending and government buying is a growth industry. In the spirit of “if you can’t beat them, join them”, one way to participate in the growth of the federal government is to invest in properties leased to government agencies.

There are just two real estate investment trusts that focus on owning properties leased to government entities. Government Properties Income Trust (Nasdaq: GOV) sports a high yield, but is saddled with a poor, third-party management agreement. GOV is one of those REITs where the management team does a lot better than the stock investors. The other government agency focused REIT is Easterly Government Properties (NYSE: DEA). This is an income stock that deserves a closer look and probably some of your investment dollars.

DEA since it’s 2015 IPO.

DEA is a growth focused REIT that came to market with a February 2015 IPO. The company has increased the dividend four times in its three-year life. This is a fact that makes this stock deserve some attention. To generate growth, the Easterly management team has a detailed plan to invest a significant amount of new capital to work each year. With a market cap of about $1 billion, the company has targeted acquisitions of $200 to $300 million per year.

Easterly has a three-prong analysis system when selecting new investment properties. They want to work with agencies that have growing missions in the Federal government. Examples are the Veterans’ Administration, the FBI, and Homeland Security. With these agencies, Easterly wants to find properties that are mission critical to the specific agency. Finally, the buildings or facilities must be attractive investments as commercial properties. This means they are relatively young or build-to-suit, are strategically located, and the leases are accretive to Easterly.

DEA currently owns 47 properties with 3.8 million square feet of space. The average age is 11.8 years and average remaining lease term is 7.1 years. New leases have terms of 10 to 20 years, with 5 to 10-year renewal options. Government agencies rarely leave a building. Lease renewals equal rent increases and more profits for Easterly. Growth for this REIT will be a combination of steady acquisitions and rental rate increases.

Finally, leasing properties to Federal agencies requires in-depth knowledge of Government Services Administration (GSA) procurement process, protocols and culture. This is a commercial real estate sector with high barrier to entry. As a result, being able to meet an agency’s needs is more important than being ultra-competitive on the lease rates. DEA can generate attractive returns from having the world’s most credit safe tenant. You can expect high single digit annual dividend growth from this REIT, combined with a 5.3% current yield. Attractive!

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