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Cohen & Steers Reit and Preferr Message Board

  • Stock_Aficionado Stock_Aficionado Jun 12, 2008 5:53 PM Flag

    Nobody Panic (Part 3)

    There are reasons for everything -- some valid, others irrational. RNP has been on the move recently for a number of internal and external factors.

    First, it’s that time when the fund goes "ex-dividend" and the price is "adjusted" for the coming dividend. Historically speaking, stocks (and funds) sell off following the last possible day to own the stock and receive the dividend. A number of dividend capturing strategies cause volatility in stocks (and funds), as traders get their name on the books for upcoming dividend payment.

    Second, it’s also that time for sector rotation as money is moving out of sectors that have performed (energy, commodities) and into sectors that have under performed (financials). Based on the volume indicators, there are a number of wagers being placed on leading names in the sector. REITs bottomed months ago, and will likely perform at normal levels moving forward.

    Of note is the likelihood that preferred shares were sold to redistribute capital into more attractive common shares. Valuations are "once in a lifetime" cheap in financials, though the earnings power of some investment banks have been restrained. Expect some increased regulation and oversight, but look to free cash flow as an indicator of a financial companies future earnings power.

    And third, are the prospects of higher rates, specifically LIBOR. The Fed and European regulators have been jaw boning inflation fighting (raising rates) because of the artificial rise in commodity prices. Rates will eventually rise to curb inflation, as some of the commodity price movements are justified. However, growth always trumps inflation, so don't expect rates to shoot to the moon. Remember -- rising rates are a sign of economic strength.

    Of note here is the growing worry about the commercial side of the mortgage market. There are some signs of rising defaults; however, they are nothing on the scale of the residential collapse.

    The discount to NAV has been increasing as of late. This is actually a good thing, as discounts are the norm for closed-end funds and have not been prevalent in recent weeks. It is not uncommon for RNP to trade at 5-10% below NAV, so don't panic if RNP underperforms the underlying assets.

    The risk to RNP and other leveraged closed-end funds is the rise in LIBOR rates. Recall that CNS has cautioned investors that a sizable rise in LIBOR rates might impact the ability of the fund to maintain distribution rates. Again, I would not expect rates to hit the moon. Also look for CNS to make alternative arrangements for leverage financing.

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