On November 4th, I wrote that a significant amount of money was coming out of REITS and consequently, I changed many of their signals to DOWN. One of the few UP signals I was lucky enough to retain was Equity Office (EOP). Not that I take much consolation from being surrounded by analysts that feel like me, but a few others were sounding the alarm. REIT valuation metrics were telling me that they were overvalued relative to the market and compared to historical averages for the sector. More importantly, the performance over the past 5 or 6 months had pushed many of their yields down significantly below the 2-year Treasury and most money market accounts, for that matter. During earnings season, a string of REITs either missed their estimates or provided weak guidance.

A selloff made so much sense, but early last week there was a very weird rebound in the shares and it was so broad-based that I decided to keep a closer eye on it. I couldn’t believe it, but for some reason, selling pressure almost stopped by Tuesday of last week and then the buying came in. It was more than just short covering of positions (note the short ratios of various REITs) and prices were on the rise again. The news of Blackstone’s bid for EOP prior to yesterday’s open was all I needed to convince me to reverse course on a bunch of the REIT DOWN signals that I had given within the last few weeks.

I hate doing that, but these kind of moves are tough to fight - especially after the first small pullback in a 6-month period. Here’s where it gets ugly - I FULLY EXPECT TO CHANGE THEM BACK TO DOWN SOON. None of this upward move makes sense to me, but my focus at HEDGEfolios is to give signals based upon the probability that I see stocks going up or down, regardless of what I personally think. At some point though, you have to wonder how many other deals are out there for private equity to buy all the REITs that went up in sympathetic speculation. For the moment, my REIT signals have been beaten by Blackstone and even more, by all the follow-on trades that bid up the other symbols. If nothing else, it has become a convenient opportunity for holders to sell more of the REIT shares at inflated prices to speculators that love to imitate smarties like Blackstone. For my part, I take no shame in being beaten by the best and I’ll just try to beat the rest.