Edition #20 - 6.10.2021
Real Estate Equities on Fire, Bitcoin Becomes Legal Tender in El Salvador
Economy:
No major updates on economic conditions. As I highlighted in a prior newsletter from this week, the key data being released this week is coming out this morning at 8:30am ET for the May 2021 inflation figure. This will surely be the economic topic for tomorrow’s report.
Stock Market:
One of the hottest sectors to be invested in so far YTD has been real estate. $XLRE, $SRVR, $REZ, and $REET are my favorite ETF’s in this space, but I have some personal favorite individual companies that I’ll touch on at the end of this segment. To visualize the relative strength and performance of the real estate sector, the following chart helps to show just how strong & significant the recent performance in real estate has been.
With all of the concerns about real estate going into the pandemic, the REIT’s got absolutely punished in terms of price. Many that I track on a frequent basis fell more than -70% from peak to trough, meanwhile the S&P 500 fell by -35%. While a lot of the concerns about real estate pertained to commercial properties, almost all REIT’s had to significantly cut their dividends (which are one of the more alluring features to investing in REIT’s). As the cashflows generated by owning the equity declined, it added fuel to the fire in terms of the downside move.
Hence the massive underperformance of $REZ/$SPX after more than 1 year of sideways choppiness, even though $REZ is a basket of mostly residential real estate investment trusts. Even after the immediate impact of the COVID crash, REIT’s continued to remain weak while the S&P 500 began to recover & rally, which explains why the performance ratio continued to decline until the beginning of 2021.
This most recent rally in 2021 has resulted in a YTD performance of +24% (not including dividends) for the residential real estate ETF, $REZ. Meanwhile the Dow Jones is +12.5%, the S&P 500 is +12.3%, Nasdaq-100 is +7.2%, and the Russell 2000 is +17.8%. Meanwhile the maximum drawdown of $REZ in 2021 was -6.3%, slightly higher than the $DJX’s -4.3%. Quite simply, $REZ has provided significantly stronger returns with minimally higher levels of risk.
The reason I wanted to share this chart is to highlight the recent base that has formed and to call attention to the upside breakout in relative performance. We can see that the horizontal line on the chart acted as both support on the initial retest, then as resistance once price broke beneath it. It essentially acted as a ceiling for the entire second half of 2020. Now that this ceiling has been shattered, it shows that the psychology of buyers/sellers has changed dramatically. While I expect to see pullback in REIT’s over the coming 4-6 weeks, it seems that this trend has the potential to continue to rally & exhibit strength.
Here are a list of REIT’s that are on my radar, although I don’t own any at the moment:
$WELL, $EQIX, $CUBE, $PSA, $AMT, $INVH, $VTR, and $PLD.
Cryptocurrency:
It is official — El Salvador’s lawmakers passed legislation making Bitcoin legal tender in the country. There were several Articles in the final bill, which are worth reviewing to understand the magnitude of this milestone.
“Article 1: The purpose of this law is to regulate Bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out.
Article 2: The exchange rate between BTC and the United States dollar, subsequently USD, will be freely established by the market.
Article 3: Prices may be expressed in Bitcoin.
Article 4: Tax contributions can be paid in Bitcoin.
Article 5: Exchanges in Bitcoin will not be subject to capital gains tax, just like any legal tender.
Article 6: For accounting purposes, the USD will be used as the reference currency.
Article 7: Every economic agent must accept Bitcoin as payment when offered to him by whoever acquires a good or service.
…
Article 12: Those who, by evident and notorious fact, do not have access to the technologies that allow to carry out transaction in Bitcoin are excluded from the obligation expressed in Article 7 of this Law. The State will promote the necessary training and mechanisms so that the population can access Bitcoin transactions.
Article 13: All obligations in money expressed in USD, existing before the effective date of this law, may be paid in Bitcoin.”
On a final note, the President of El Salvador also took to Twitter to announce that the state was working on building a BTC-mining facility that was 100% powered by geothermal energy. His posts can be found here.
The Bitcoin network will continue to rely more substantially on renewable energy sources, just the production of all goods & services will continue to use renewables.
Until tomorrow,
Caleb Franzen