A recent poll in Barron’s suggested that amongst its readers the most hated asset class (not surprisingly) was real estate investments and the most loved class was Latin American stocks so most of us would think that the right trade is to buy Latin stocks and sell real estate stocks.
Funny, then, that real estate stocks are now the best-performing sector this year... Simon Property Group – the benchmark real estate stock – is up more than 20% year-to-date.
Meanwhile, the Latin American Discovery Fund (LDF) a collection of South American blue chips, is down for the year.
How does this work ??
Quite simple really when everyone is bearish then there are little or no sellers available as everyone of any size has got out of the markets previously.When there is no one selling then the price stops going down-simple really !!
So as an example : In the second week of March Simon Property Group (SPG) traded for around $86. Now – just six weeks later – it's at $105.
Conversely the Latin American Discovery Fund peaked at the end of April and has treaded water ever since... Why hasn't it gone up? For the opposite reason -there's nobody left to buy – Everyone who wanted to be invested in Latin America had already bought.
You have to wait for the extremes in sentiment. The old saying is, "The crowd is wrong at the extremes, and right in between."
If we look at the Barrons poll... Only 3.6% of investors are bullish on 10-year Treasury bonds. So nearly everyone believes long-term interest rates are going up.
Currently Long term Interest Rates are less than 4% so most pople (based on theri past experiences thinks they are unlikely to go any lower. Lets cast our eyes over to the Far East, in 1990 Japan's Interest rates were about 7% when the property market crashed the rates fell to below 1% . Today they are still only 1.5%
All the talk is about the potential for inflation... and everyone expects interest rates to head higher. however it is entirely possible that long-term interest rates could surprise us all and head lower. Already, interest rates on 10-year Treasuries have fallen from more than 5% in the summer of 2006 to below 4% now.
I am buying the IShares Home Construction Index (ITB) I don't expect it to move up overnight but I think over 6 months it will be a good call.