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Global business news twenty four hours

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a day. If Bloomberg dot Com the

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radio plus mobile LAC and on your radio.

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This is a Bloomberg Business Flight

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from Bloomberg World Headquarters. I'm

0:14

Charlie Pelota, Dow, b SMP, NAZDAK

0:16

all declining. We have got just over

0:19

forty minutes to go before we wrap up the trading

0:21

month of August. Let's head right over the first Word

0:23

breaking news desk for today's afternoon

0:25

call, and here is at Lalan. Good

0:28

afternoon, Charlie, man U. Saverages

0:30

are lower today, with the Dow down sixty

0:32

five, SMP falls eight and NASDAK

0:35

declines fifteen, small caps six

0:37

centered lower by four, and the US tenure yelle

0:39

at one point five seven per cent. All

0:42

ten SMP sectors are lower, led

0:44

by losses in energy, materials

0:46

and industrials down, Transports

0:49

fall, NASDAC,

0:51

Biotex lose twenty five, utilities

0:53

down one, and the VIX rises five.

0:56

Leaders to the downside of the down include Chevron,

0:59

Boeing, and DuPont, while down

1:01

leaders to the upside include McDonald's

1:03

and Intel. H and R Block

1:05

falls ten percent after first quarter results

1:08

trailed estimates. Viva system

1:10

rises eight percent after beating estimates

1:12

and raising guidance. Pallo Alto Networks

1:15

loses eight percent after giving a down beat forecast

1:17

for the current quarter, and Brown Foreman

1:20

loses four percent after missing first quarter estimates.

1:22

After the Bell tonight, watch for earnings from Salesforce

1:25

dot Com and five below, and

1:27

also after the Bell, watched for Costco to kick

1:30

off August retail cops sales

1:32

reports live from the first Breaking news

1:34

desk. I'm at the loan, Charlie. All right,

1:36

thank you very much a head and to hear live breaking news

1:38

over your bloom Bread time squawk asque

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you a w K on your

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terminal, and we're brought to you by a sector Spider

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et F S. Why by a single stock when

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you can invest in the entire sector

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of visits sector sp d r

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S dot com or call one eight six

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six Sector e t F. I'm

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Charlie Pellots and that's a bloom Bread

1:59

business flash.

2:02

This is taking stock with pim

2:04

Fox and Kathleen on Bloomberg

2:06

Radio. REEFS. Real Estate

2:09

Investment Trust an important milestone

2:11

this month as the SMP five

2:13

hundred decides to break those

2:16

reach shares out of its financial index

2:19

and put reads in their own separate

2:21

category. What does this tell us about the growth

2:24

of reads in their place in the economy? What does it

2:26

mean for investors who were very

2:28

happy to welcome something to the show? You can answer all

2:30

these questions and more for us. That's John

2:32

the Forge. He's head of real Assets Strategy

2:35

at the Wells Fargo Investment Institute

2:37

in St. Louis, Missouri. John, Welcome

2:39

to the show. Hi, Kathleen. How are you so?

2:42

Was this something that people were clamoring for in the industry?

2:45

How did this come about that the S

2:47

and P five hundred committee

2:50

said, okay, reads, you get your own

2:52

spot. Yeah, finally, but

2:54

it wasn't clamoring. I'd say reats

2:57

came into existence around nineteen that's

2:59

when they were signed in the law. So it took a while

3:01

before investors finally took them seriously

3:04

enough where the SMP finally said,

3:06

yeah, these aren't regular stocks, they need

3:08

to be broken out. Why did investors take them seriously

3:10

for first? It seems to me they've been so important

3:13

and when you think about it, looking for a vehicle in which

3:15

you could invest in apartment buildings or malls

3:18

or some of the chunky important parts of the

3:20

economy. Why were investors to get

3:22

on the get on board it really is Uh.

3:25

The real reason it stayed out of more of

3:27

the public sector, which would be

3:29

US investors, is that many

3:32

investors took it privately, so they wanted to

3:34

own it privately. But yeah, it took a

3:36

long long time before you know, the

3:39

the public investors such as ourselves,

3:41

mutual funds, pensions and so on, finally

3:44

took it seriously enough where it said, yeah,

3:46

this is a space we need to be invested in. What's

3:49

unique about reats For someone who

3:51

has not invested in these companies yet, what

3:53

do they need to know in terms of what makes

3:55

them different and therefore that gives them different

3:58

opportunities, whether lines of stocks with a

4:00

kinds of companies and what is the risk with

4:03

them? Yeah, the major differentiator

4:05

is the idea that with with reads

4:08

you actually buy law. To be classified

4:10

as a real you have to at least seventy your

4:13

business come from real estate, predominantly

4:16

income producing real estate. If you think of

4:18

a regular stock like take Microsoft

4:20

as an example, they don't have to get

4:22

all their business from software. If they wanted to go

4:24

invest in place ELTs, they could, but in exchange

4:27

for that of doing seventy percent of

4:29

your business from real estate, you

4:31

get a certain tax status that allows you

4:33

to pass on a lot of your income tax

4:36

free. So a read that manages

4:38

real estate for you, they don't pay a corporate

4:41

tax rate like Microsoft does, So

4:43

you get taxed twice as an investor if you

4:45

invest in Microsoft, you really only text

4:47

once if you're investing in Reads. Okay,

4:50

so the reads are gonna be there are separate

4:52

indexy broadly

4:55

in terms of reads. I mean you

4:57

are overweight, you wrote recently if

5:00

to let her earlier this month, but you have some

5:02

concerns. Yeah, Reeds

5:04

have been a great play ever since we've been overweight,

5:06

which has been about nine months now. But

5:10

we've seen a little bit of weakness recently, and we

5:12

believe that is because we're starting to

5:14

see one lending standards

5:16

by banks are starting to tighten a little bit, not

5:18

necessarily good. Uh, your real estate

5:21

gains in price are starting

5:23

to slow. And and what I mean by

5:25

that is you're looking at year to year price

5:27

games in real estate today about five percent,

5:30

but if you go back a year ago, was closer to twelve

5:32

percent, thirteen percent, and that

5:35

was the same in two thousand fourteen, two

5:37

thousand thirteen, two thousand twelve,

5:39

we had those mid teens price games

5:41

and now we're down to five percent, So we're still

5:44

positive, but is getting weaker.

5:46

Uh, And those are the two big ones. Plus number

5:49

three is there's been some polling

5:51

recently of real estate insiders

5:54

and they're getting worried. These lending standards

5:56

are really making it harder to do business. So you're

5:59

starting to see some of the red games we've

6:01

seen year to date in two thousands sixteen

6:03

is starting to pull back in a little bit. So,

6:06

Uh, you have I have to ask everybody the same question

6:09

because we just about any kind of investment you're

6:11

going to make, but particularly in any kind of real estate

6:13

interest rate sensitivity. Right, Yeah, the

6:15

reserve is going to meet in a couple of weeks. Jobs

6:17

report on Friday. Would interest rate increases

6:19

make a much of a difference to the outlook for reads?

6:22

It can. What I would do as investors

6:25

is you really need to look at the internals

6:27

of your reads and and look at one particular

6:29

statistic, and that is do

6:32

the reads that you own do they have the ability

6:34

to grow their dividends? Because

6:36

what We've found when we've tested this historically,

6:39

is if we start seeing interest rates

6:41

begin to rise, the reds

6:43

that have the ability to raise their dividend

6:45

payments through time as interest rates are

6:47

going up, Wall Street pretty much gives

6:50

them a pass. They're okay with that, they still

6:52

invest in them. They don't they don't hammer them.

6:54

But it's the reds or anything really high

6:56

yielding that does not have the ability

6:58

to raise their div than payments. What

7:01

Wall Street does is they typically target

7:03

them as like a bond and they

7:05

really whack them pretty hard. Well,

7:08

it's gonna get rat rack pretty

7:11

hard. That whacking might mean I guess you

7:13

should be getting ready to lighten up on those

7:15

reads or maybe just take a slightly different position.

7:17

John LaForge, thank you so much for joining

7:19

us. John has head of real asset

7:22

Strategy at the Wells Fargo Investment

7:24

Institute. He says he's

7:26

had a by call sort of been a

7:29

plus looking at reads for an investment

7:31

for the last nine months, starting to a little more

7:33

cautious on that for a variety of reasons. In terms

7:35

of looking at the commercial real estate industry.

7:38

Up next, we're gonna be looking at

7:41

the markets. This is Bloomberg,

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