Continued market meltdown

I note the TSX index is down about 7% year to date.

The interest rate rises are finally starting to hit the markets with asset price drops. Some items are finally hitting my radar in terms of the watchlist and my research queue.

In particular, what has caught my attention are the drops in equity prices in certain REITs.

There is a double-whammy: higher interest rates result in higher interest expenses (when firms have to refinance debt or pay floating rates) and because of higher costs of capital, asset prices will decrease (which also get reflected in balance sheets due to IFRS fair value adjustment rules – rules that make income statements appear even more un-readable for untrained eyes).

I also don’t know whether this is correlated in anyway to the plummeting in oil prices, but as a consequence, most oil stocks have gotten killed in the past month. This is reminding me of what happened to a lot of companies in the December 2015 to February 2016 meltdown that took some Canadian preferred shares to double-digit yields. The environment is a lot different, however. Making money on asset appreciation is much more difficult in an environment when the cost of capital is rising and money is being drained out of the system at an increasing pace. The most similar analogy is trying to make head-way on a sailboat when the winds are blowing against you at increasing speeds – it is still possible to move forward, but you have to zig and zag to get to your upstream destination.