So how can you trade the banking/real estate theme?

13-Oct-2010

I like this.

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Liu-Yue (Louie) Lam, Co-Founder, CEO, Oxstone Capital Management

Based on the scenario I mentioned in my article (Why Bank Lending Is Not Coming Back AnyTime Soon?)

This is how I would trade the banking/real estate theme:

I would bet in the long run on interest rates eventually rising therefore buy the inverse of long 10 Year or 30 Year US Treasury Bonds or directly short the long positions.  I would short the Real Estate market and any sectors that are tied to the real estate market.  Historically there has been a high correlation between the US Treasury Yield and Bank Lending.  With US Treasury Yield declining to a low of 2.47% it is highly likely that bank lending will follow the yield down.  Bank lending is the life blood of the commercial real estate market and the economy as a whole and the economy cannot achieve sustainable growth without sustainable lending.    Please check out our ‘ETF List’ for a complete free list of tradable ideas.  You can short ETF Bonds and Mortgage-Backed Bonds or buy the Inverse ETFs.   Also look for short opportunities in REITs.  The following sectors are places to look for short opportunities:

Building & Construction ETF List

Financial ETF List

Government Bond ETF List

Inverse ETFs

Mortgage-Backed Bond ETF List

Real Estate ETF List

For a complete free list of individual stocks by sector please check out our ‘Stock List’ tab.

Areas where you should look for short opportunities are the following:

REITs that are heavily concentrated in retail and office buildings.   A good gauge on REIT valuation is using the REIT Yield.  Historically there is roughly 300 bps spread between REITs and the 10 Year US Treasury Yield.   REITs currently trading at yields less than the historical spread (currently a REIT yield between 5.5%-6% yield) may not be providing the necessary risk premium and may be over-valued.

REIT – Equity Trust Retail

Real Estate Developers

Real Estate Operations

In terms of banks to short, I would focus on regional banks situated on the midwest, south east and east coast.  I think that the western real estate market in the USA has near a bottom or close to it after significant declines and will most likely be the first to rebound.  The catalyst for the western real estate markets is the closer proximity to Asia and therefore they will most likely benefit from the weak dollar trade with Asia.  (part of the new silk road theme-Asia trade)  However, the real estate market has not really declined significantly in the north east and the defaults/foreclosure pipeline will most likely gradually move up along the coastline from the southeast and move up to the north east.   A good gauge on which regional and community banks to short would be to observe which banks have significant short interest.  Then review the financial strength of banks by looking at their Tier 1 Ratio.  Tier 1 Ratios between 8% to 10% in today’s environment is necessary.  Also look at their NPA – Nonperforming Asset Ratio and Tangible-Common Equity Ratio.

A NPA above 4%+ is a concern.  For Tangible-Common Equity Ratios, anything below 3% is a major concern.

Good luck hunting.

Finance – Consumer Loans

Finance – Leasing Companies

Banks – Major Regional

Banks – Northeast

Banks – Midwest

Banks – Southeast

Finance – Savings & Loan

Building & Construction – Misc


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