Fundamental Analysis—Renaissance IPO Index

Figure 1.  Top 10 holdings of Renaissance IPO Index (source: Charles Schwab)

The Renaissance IPO Index is a portfolio of companies that have recently completed an initial public offering ("IPO") and are listed on a U.S. exchange.

Figure 2.  Recent IPOs are breaking down relative to the S&P 500

In [2], Bloomberg reported on 09/25/2019 that:

The 2019 class of IPOs includes a number of so-called unicorns, including high-profile market entrants like Uber Technologies Inc., Lyft Inc., and Pinterest Inc. Together, the unprofitable IPOs have already raised the most cash of any year since at least 2000, according to a Bloomberg analysis of listings worth $100 million or more.

In [4] , Financial Times reported on 11/22/2019 that:

But Bank of America investment strategist Jared Woodard offers a note of caution. 

“Just 14 per cent of US tech IPOs are profitable this year, the last time that happened was at the dotcom peak in 2000 and we all know what happened after that,” he noted.

Figure 3.  Unprofitable Companies Are Raising the Most IPO Cash Since the Dot-Com Era 

Figure 4.  The cycles of IPO risk (source: Bloomberg)

References

1. Renaissance IPO Index
2. Unprofitable Companies Are Raising the Most IPO Cash Since the Dot-Com Era
3. Goldman and Morgan Stanley expected to suffer IPO earnings hit (FT on 10/13/2019)
• The tough IPO market has broader implications, especially for banks such as Goldman and Morgan Stanley, who rely on investment banking for a higher percentage of their earnings than universal banks such as JPMorgan Chase and Citigroup.
4. A year in which the IPO market sobered up (11/22/2019)
• So far 38 IPOs have been pulled this year, according to data provider Dealogic, compared with just eight in 2017. WeWork is the highest-profile example.

Fourth Turning—Crisis from 2008 to 2030

Video 1.  The Fourth Turning: Why American 'Crisis' May Last Until 2030 (YouTube link)

Video 2.  The Fourth Turning with Neil Howe on The Macro Show (YouTube link)

Video 3.  Neil Howe: The Fourth Turning Has Arrived (YouTube link)

According to the authors—Strauss and Howe, the Fourth Turning (roughly from 2008 to 2030) is a Crisis. This is an era of destruction, often involving war or revolution, in which institutional life is destroyed and rebuilt in response to a perceived threat to the nation's survival.

09/20/2021 SPX Monthly (source: @InvestingAngles)

As Robert Prechter. noted in a study he published in 2012 on Socionomic theory, proposes that unconscious social mood regulates social actions (including our willingness to buy stocks).

Interestingly, it seems to match approximately the prediction of the Elliott Wave Theory (EWT) which foresees that, after stock market reaches a peak in the year around 2022, it then will go through the a-b-c correction phase.  This correction phase will last roughly from 2022 to 2037.

On 10/02/2022, Avi—an EWT analyst—had commented that:^[12]

One way or another, I am expecting a major bear market to begin and last at least 7-8 years, and potentially as long as 20.

Final Thoughts

Finally, if the authors Strauss and Howe are correct, "maybe" (note: not a prediction) the next debt will be burst by a civil unrest or another war in the future.

Updated (04/08/2020):

Analyst Dales Roberts has claimed that fighting Covid-19 is World War III in his article [2,3].

In a Foreign Policy piece, Nicholas Mulder highlights the way in which nations around the world have gone into wartime mindsets to fight the pandemic, both to control their populations and to mobilize resources and production. He connects the steps being taken today, such as enacting the Defense Production Act and instinctively using debt-financed federal spending to support the embattled citizenry, with those taken during the two world wars of the twentieth century. 

On a CNN report —U.S. Warships Enter Disputed Waters of South China Sea as Tensions With China Escalate, it states that:

• The move comes as a war of words between the United States and China over the coronavirus pandemic intensifies

Video 4.  Elliot Wave and the Kondratiev Wave Together (YouTube link)

References

1. If You Want Trump Out, You Need To Sell Your Stocks
2. Fighting COVID-19 is World War 3 – Weekend Reads.
3. The Reasons Why The Markets Will Go Much, Much Lower From Here
4. The Coronavirus War Economy Will Change the World
5. U.S. Warships Enter Disputed Waters of South China Sea as Tensions With China Escalate
• The move comes as a war of words between the United States and China over the coronavirus pandemic intensifies.
6. Kiril Sokoloff: ‘There will have to be massive debt relief’
• In an interview with Rana Foroohar, the famous Wall Street strategist Kiril Sokoloff mentioned this book "The Fourth Turning" which he described as a very prophetic book.  
7. "Losing The Bottom": Market Capitulates On The Idea That Normalization Is Ever Again Possible
• This is also the reason why we remain steadfastly in the corner of hard assets as a world in which the only backstop of economic, monetary, political and social stability is accelerating dilution of fiat, means that currency collapse is only a matter of time.
8. Why the US risks a new epidemic of violence (ft.com)
9. The Changing World Order - Where We Are by Ray Dalio
10. 10 "Big" Things For Stocks In The Coming Decade 
11. What Will Not Change
12. Sentiment Speaks: Market Approaching A Potentially Major Bottom (10/02/2022)

Hedgeye's Macro Model―Growth, Inflation, Policy Model

"In The Arena" with Darius Dale & Daryl Jones (YouTube link)

Hedgeye's GIP model (i.e. Growth, Inflation, Policy Model) is a regime-based sort of framework. Both Dallio's Reserch and Hedgeye findings have proven that the two most important factors for investors to track the future financial market returns is the the rates of change in:

• Growh 
• Inflation.

as policymakers typically respond to subsequent levels on a lag.

From the rate changes, you get four possible outcomes, each of which is assigned a “quadrant” in their Growth, Inflation, Policy (GIP) model and the typical government response as a result (neutral, hawkish, in-a-box or dovish):

• QUAD 1
• Growth accelerating, Inflation slowing 
• Monetary policy bias: Neutral
• Market Narrative: Goldilocks
• Normally, you see
• Really positive for both equity and credit data across all sectors of the U.S. economy
• The best quadrant for equity return
• QUAD 2
• Growth accelerating, Inflation accelerating
• Monetary policy bias: Hawkish
• Market Narrative: Reflation
• Normally, you see
• Economy is overheating
• Bond yield rising
• 2nd best quadrant for equity return
• QUAD 3
• Growth slowing, Inflation accelerating 
• Monetary policy bias: Neutral
• Market Narrative: Stagnation-to-Stagflation
• Normally, you see
• Late-cycle expansion
• Stock-picker's & credit-picker's market
• QUAD 4
• Growth slowing, Inflation slowing 
• Monetary policy bias: Dovish
• Market Narrative: Deflation
• Normally, you see
• Quite negative for both equities and credit
• Unless you invest in safe-haven asserts such as treasury bond, gold, and dollar

Senior Macro analyst Darius Dale at Hedgeye explains how their GIP Model can help investors proactively prepare their portfolios for “bouts of volatility,” recession and more.

Here’s a key excerpt.^[2]

“If we can use our forecasting tools to sidestep bouts of volatility in particular asset classes, we can grow the net asset value of our portfolios in a much more risk reduced manner…What you see heading into a recession is that cycles tend to peak out in Quad 3… Then you slow into Quad 4 and that persistency of Quad 4, Quad 4 after Quad 4, is how recessions occur…We don't necessarily care about calling recessions because again, if we're set up for the asset allocations that history would suggest you should be in for Quad 4 and Quad 3 as well, then you don't necessarily have to make the recession call because you're already in the right types of assets that do well.”

References

1. Growth, Inflation, Policy (GIP) Model
2. "In The Arena" with Darius Dale & Daryl Jones
3. Hedgeye's "Trade,Trend,Tail Process"
• "Trade" is a duration of 3 weeks or less
• "Trend" is a duration of 3 months or more
• "Tail" is a duration of 3 years or less
4. The World's Top Experts On Money & The Markets
• Jim Grant, Lacy Hunt, Luke Gromen, James Rickards, Danielle DiMartino Booth, Brent Johnson, Lance Roberts, Tavi Costa, Rick Rule

REIT Investment Basics

In [10], Charles Schwab provides the case for REITs.  Here are the four reasons why REITs might deserve a place in your portfolio:

1. Diversification
• REITs rarely perform in lockstep with stocks or bonds due to the below reasons:
• In recent years, the divergence was partly the result of low interest rates, which caused yield-hungry investors to drive REIT prices higher.
• REITs tend to follow the real estate cycle, which typically lasts a decade or more, whereas bond- and stock-market cycles typically last an average of roughly 5.75 years.
2. Income
• In 2018, U.S. REITs yielded 4.88%.
3. Inflation hedge
• Real estate has tended to fare well in the face of rising prices.
• REITs with commercial holdings frequently have agreements that allow them to raise rents in tandem with inflation.
4. Long-term growth

If you choose to invest in REITs, do consider the following factors:

• REITs are poor investments during periods of increasing interest rates, when rising yields from fixed income investments make REITs--which are risker--less attractive.
• REIT dividends typically aren't treated as qualified dividends and will generally be taxed at higher ordinary income tax rates.
• Because REITs tend to be volatile, they should constitute no more than 5% of your portfolio.^[10]

What's a REIT?

A real estate investment trust (REIT) is

• A company that owns, and in most cases operates, income-producing real estate. 
• REITs own many types of commercial real estate, ranging from office and apartmentbuildings to warehouses, hospitals, shopping centers, hotels and timberlands. 
• Some REITs engage in financing real estate.

What are the different types of REITs? REITs can be:

• Equity REITs
• The majority of REITs are publicly traded equity REITs. Equity REITs own or operate income-producing real estate. 
• In November 2014, equity REITs were recognized as a distinct asset class[6] in the Global Industry Classification Standard by S&P Dow Jones Indices and MSCI. 
• mREITs (or mortgage REITs) 
• Provide financing for income-producing real estate by purchasing or originating mortgages and mortgage-backed securities and earning income from the interest on these investments.
• In [7], Jussi Askola claimed that mREITs (vs. Equity REITs) are quite different businesses and carry more risk.
• In [6], Chuck Carnevale commented that Annaly Capital Management (NLY), Dynex Capital, Inc. (DX), and  AGNC Investment Corp. (AGNC) are not desirable for your retirement portfolios.
• Public Non-listed REITs 
• Public, non-listed REITs (PNLRs) are registered with the SEC but do not trade on national stock exchanges.
• Private REITs 
• Private REITs are offerings that are exempt from SEC registration and whose shares do not trade on national stock exchanges.  Do read [11] before you invest in private REITs.

The two main types of REITs are:

• Equity REITs
• mREITs  

The key statistics to examine the financial position and operation of a REIT are:

• Net asset value (NAV)
• According to NAREIT, REIT share prices are currently trading at a premium over NAV of 12%.  In [6], Arturo Neto concluded that REITs are solid investments. But, they're looking pricey now (09/20/2019).
• Net Operation Income (NIO)
• Funds from operations (FFO)
• Is a better indicator of a REIT's performance than the more traditional earnings per share reported by most other companies; in other words, FFO is to REITs what EPS is to other companies
• Adjusted funds from operations (AFFO).

How does a company qualify as a REIT?

To qualify as a REIT a company must:

• Invest at least 75% of its total assets in real estate
• Derive at least 75% of its gross income from:
• Rents from real property
• Interest on mortgages financing real property 
• Sales of real estate
• Pay at least 90% of its taxable income in the form of shareholder dividends each year
• Be an entity that is taxable as a corporation
• Be managed by a board of directors or trustees
• Have a minimum of 100 shareholders
• Have no more than 50% of its shares held by five or fewer individuals

Table 1.  REIT preferred stocks paying roughly from 6% to 8% yield

Preferred REIT  

REIT preferred stock is a type of hybrid security with both equity- and bond-like characteristics. Within the capital structure of REIT companies, preferred stocks have a senior claim to earnings and dividends versus common stock but are generally junior to corporate bonds.

In [2], it states that REIT preferred stocks can:

• Provide essential stability to a retirement portfolio.
• Provide an effective path to withdrawals if you use them in a ladder
• Excel in the expected flat or bearish bond markets
• Be secure if History and logic imply that well-chosen

and it also provides a list of REIT preferred stocks paying roughly from 6% to 8% yield in Table 1.  You can consider them a starting point with due diligence.  Besides an investment's high yield, for example, you also need to consider the below factors:

• Financial strength - the key to paying the dividend
• Future growth - the key to raising it
• Debt/Leverage - the weight pulling down the company

Simon Property Group

Simon Property Group's Preferred REIT (see Figure 1) as listed in Charles Schwab will be used as a case for further illustration.

Terminology:

• Current Yield
• Current Yield = Indicated Annual Rate / Share Price as of previous close
• 5.80% = $4.19 / $72.25
• Stated Call
• A security with a stated call can be redeemed prior to maturity at the issuer's discretion on specified dates at specified prices. Callable securities are generally more risky for investors than non-callable securities because an investor is often faced with reinvesting proceeds at a lower, less attractive interest rate.
• Stated Call Values
• Yes: The security is callable, but a call notification has not been issued.
• No: The security is not callable.
• Call Scheduled: A call notification has been issued for this security.
• Cumulative
• A preferred security with a cumulative feature requires a company to make a dividend or interest distribution to shareholders of that security before any other distributions can be made to common shareholders. 
• When a company fails to make a dividend or interest payment to preferred shareholders, the past omitted payments accrue and are paid in a future payment to a cumulative preferred shareholder before distributions can be made to any common shareholders.
• Extraordinary Call
• Investments with extraordinary call provisions provide an issuer the right to redeem a security before the maturity date due to unforeseen or unusual circumstances. 
• Reasons an issuer might use an extraordinary call provision include asset sales, covenant violations, and tax law changes among other reasons. 
• The terms of the redemption are stipulated in the official statement for the security. 
• Securities with extraordinary call provisions require extra due diligence by investors. If you buy a security with an extraordinary call provision at a price above par value, and the security is called, you would generally receive par value, and forfeit any premium paid for the security.
• Sinking Fund
• An account to which the issuer must make periodic payments to be used to redeem specific outstanding securities. 
• A sinking fund may be required by the official statement to improve the likelihood of repayment. 
• If the issuer fails to make payments to the sinking fund, it can result in default.
• Convertible
• A convertible feature of a preferred security traditionally provides the right for the holder to exchange one type of security for another, such as the ability to convert a bond or preferred stock to the issuer’s common stock. 
• There are instances, however, when this feature is provided to the issuer of the security, such as a mandatory conversion at a future date.

Figure 2.  Dividend / Coupon Features of SPG Preferred REIT (accessed on 09/02/2019 at Charles Schwab)

References

1. What's a REIT?
2. Sell Your Bonds! Buy REIT Preferreds Instead
3. Guide to Equity REITs
4. Guide to Mortgage REITs
5. REITs Are Solid Investments, But They’re Looking Pricey (good)
6. AGNC Investment Corp.: Not Suitable For Retirement Accounts
• Companies with long histories of increasing their dividend every year are desirable, and companies that reduce or cut dividends are considered undesirable.
7. Your REITs Will Vanish
8. REITs Are A Buy: These Are The Ones Dividend Growth Investors Should Focus On
• If payout ratio is below 65%, I'm very happy. I like a lower ratio for two reasons, the first is dividend safety and the second is the outlook for distribution increase.
9. Your REIT Could Go Bankrupt (good)
10. Charles Schwab OnInvesting (Summer 2019)
11. What is happening now with private REITs is more important to markets than the FTX blow up. (must read)