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4-14-03                                                                                           Vol. 6: No. 4
RealtyStocks' Observer
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Monthly Feature:
AS THE IRAQ WAR NEARS AN END,
NEW CONCERNS SURFACE
And Quarterly Earnings May Disappoint

A. As the Iraq War Nears An End, New Concerns Surface
B. Quarterly Earnings Look to Disappoint
C. Large Cap REIT Performance
D. Equity REIT Performance
E. Mortgage REIT Performance
F. Realty Corporations
G. Real Estate Mutual Funds

A. AS THE IRAQ WAR NEARS AN END, NEW CONCERNS SURFACE
The fear of a prolonged war, the use of weapons of mass destruction, domestic terrorism and substantial loss of military and civilian life - have all subsided. It seems as if the Iraq army has folded, never really mounting a cohesive defense against Coalition forces. The most significant resistance in the Iraq War seems to have been the Fedayeen, irregular soldiers and suicide bombers. They could continue to make parts of Iraq unsafe for quite a while. Even though the Saddam regime has crumbled, it appears the closure to this war may be more difficult than has been in prior wars. With no one apparently left in control of Iraq, there will probably be no armistice or official surrender. Since the fate of Saddam may not be known for some time, if ever, it could prolong holdouts and terrorist activities.

Though the initial dire consequences of the War are vanishing, new and difficult issues have arisen. First, is the need to quell the anarchy, looting and lawlessness that is ramped in most Iraq cities since the fall of the Saddam regime. Besides restoring order to Iraq, and abating growing Iraqi resentment to Coalition forces for not responding sooner, the next big issue is, "Who and how will Iraq be governed?" The International community is squabbling over this issue, with France, Russia and Germany, all concerned with how they can now benefit from rebuilding a post war Iraq since they were such strong opponents against the War. The former two countries are also concerned with the recovery of billions owed to their countries by Saddam's regime. The controversial U.S. backing of ex-patriots, especially Ahmad Chalabi, who has been absent from Iraq for decades, combined with the recent assassination of religious leaders, creates a leadership vacuum that may be very difficult to fill. Finally, one of the biggest issues of all is finding weapons of mass destruction (WMD) in Iraq. It appears Coalition forces were ill prepared to quickly contain some palaces, ministries, museums and a hazardous nuclear reactor site from plundering. As a result, useful information about WMD and Saddam's relations with terrorists may never be found. Without material needed to justify the war, International resentment to the U.S. will not subside, especially by the Arab people, for a very long time. Far worse, would be if WMD slipped out of Iraq, it could greatly increase the magnitude of future acts of terrorism.

Though it seems the Iraq War will succeed in avoiding the destruction of much of Iraq's infrastructure and oil fields, and resulted in fewer loss of lives than many expected, it is apparent that these new concerns over Iraq will linger for some time. Unfortunately, they may continue to impact our economic recovery in ways we may not have anticipated. Most importantly, it is hoped that any weapons of mass destruction in Iraq did not fall into any diabolical hands and that we can feel more secure, not the reverse, over potential terrorism. With respect to international trade, just as the U.S. scoffed at French goods in the beginning of the Iraq War, there may be increasing anti-American toward the usage of our goods and services abroad. Tourism into and even out of the U.S. may decline; further hurting hotels, airlines and tourism. The concern of a deadly flu-like virus, SARS, is also affecting foreign travel and is compounding the problems in these industries. Diplomatically, the U.S. may also find itself much more isolated and less effective in influencing global issues. However, certain companies, like Vice President Cheney's former firm Halliburton that obtained a non-competitive bid possibly worth over a billion dollars, as well as Qualcomm, if its CDMA is selected over the European GSM standard in Iraq, could greatly benefit greatly.   Top


B. QUARTERLY CORPORATE EARNINGS ARE LIKELY TO DISAPPOINT.
Over the next couple of weeks, most public companies will be releasing earning reports for the first quarter of 2003. With consumer sentiment at its lowest levels in years, increased unemployment claims, a pervasive "wait-and-see" attitude that has slowed spending all together, and a long winter in the northeast that has slowed retail sales - it is likely many earnings reported will be lower than expected. The purchase of autos and other big-ticket items has also lessened since the beginning of the year, which may be a clear indication that consumer spending is dissipating. To make up this gap, it is necessary for corporate spending to increase. But without stronger earnings, which would add new jobs and increase consumer spending, a more robust economy is unlikely.

This somber state of the economy may keep the lid on a "victory rally" that many expected after the Iraq War. Since most equities do not seem under priced, especially by historical standards, there does not appear to be a reason for equity markets to surge. However, with trillions of dollars in such "liquid" assets obtaining paltry returns, and with those who wanted to get "out of stocks" now out, the demand to own stocks could outpace the supply in the short term. Longer term, corporate earnings and job growth must improve in order for the stock market to obtain a sustained rally. Though most economists are predicting an improved economy later in the year, it is quite possible this decade will be more similar to the sidewise markets of the 1970's, as we noted in our prior newsletters. The dot com bust may have had a more dehabilitating affect on stocks and the economy than initially thought. In particular, it has made the environment to develop technology companies, which are needed to help replace the vast number of jobs that are disappearing and to drive the economy forward, more difficult.

Strong housing markets, which have enabled consumers to become active purchasers through home equity loans, are at historical highs. This can only be maintained if interest rates hold steady or drop. We continue to be concerned that if the economy starts to rebound sharply or if stocks begin to jump, the result will be much higher interest rates, which will result in lower real estate values. And, if higher rates are sustained, due to the many adjustable and short-term rate mortgages outstanding, we are fearful that mortgage defaults could increase dramatically. Instead of a housing bubble pop, however, a drawn out real estate slump may occur that could even draw us into another recession. Additionally, with many 3 and 5 year mortgages outstanding, it may take us a couple years after this point, or in the latter part of this decade, for the housing market to fully recover again. Since many housing markets declined for several years in the early 1980's and the beginning of the 1990's, it would not be unprecedented for a similar downward real estate cycle to begin again soon. Ironically, it may be that the only way to keep the housing market from falling precipitously, is for the economy to stay relatively flat or to continue to falter; a situation that we believe is becoming more plausible.   Top


C. LARGE CAP REIT PERFORMANCE
In April, Large Cap REITs ended with a monthly price increase of 3.9%. The best large cap performer for April was between Health Care Property Inv. (HCP) and Host Marriott Corporation (HMT) which both had a gain of 11.6%. The worst performing large cap REITs for the month were AMB Property Corporation (AMB), falling -3.4%, and Crescent Real Estate Equities (CEI), dropping -1.4%. Year-To-Date (YTD), the best performing stock, for the third month in a row, was Kimco Realty Corporation (KIM), gaining 18.1%, and the worst YTD was Hospitality Properties (HPT), losing -18.2%, respectively. Please see
Large Cap REITs.)   Top


D. EQUITY REIT PERFORMANCE
Equity REITS had a strong monthly gain of 5.09% for April. The best performing group for the month was
Hotels up 12.3%, followed by HealthCare, up 11.5%. All the groups showed positive gains this month, the lowest gain, but still positive, was the Specialty group, up 1.28% . The best performing groups YTD were Specialty, up 12.02%, followed by Retail Factory Outlets, up 11.47%. The worst groups YTD for April were Hotels, down -6.15%, and HealthCare, down -4.01%. The best performing stocks for April were Jameson Inns, Inc. (JAMS) and LTC Properties, Inc. (LTC), gaining 27.3% and 22.4%, respectively. The worst monthly performers were Gofl Trust of America (GTA) and Hospitality Properties (HPT), losing -13.7% and -5.7%, respectively. The best performing stocks YTD were Golf Trust of America (GTA) and Prime Group Realty Trust (PGE), gaining 58.5% and 38.8%. The worst performing stock YTD were Felcor Suite Hotels, Inc. (FCH), losing -38%, and Meristar Hospitality (MHX), losing -37%, respectively. (Please see Equity Gainers and Losers.).   Top


E. MORTGAGE REIT PERFORMANCE
This sector finished April with a strong gain of 6.03%. The best performing group for April was Residential Mortgage, gaining 16.42%. YTD the mortgage sector had a strong gain of 6.64%. The best performers for April were American Residential Inv. Trust (INV) and Novastar Financial, Inc. (NFI), up 49.6% and 25.8%, respectively. The worst performers was Fog Cutter Capital Group (FCCG) losing -7.2%, respectively. The best performers YTD were American Residential Inv. Trust (INV), up 50%, and Novastar Financial, Inc (NFI), up 38.4%. The worst performing stock YTD was Capstead Mortgage Corp (CMO), losing -54.8%, respectively. (Please see
Mortgage Gainers and Losers.)   Top


F. REALTY CORPORATIONS
Realty and Housing Corporations had a strong price gain of 10.12% in April, all the groups showed positive gains. The best monthly performer was
Home Builders with a gain of 16.7%. The worst monthly performer was Timberland with a gain of 6%. The best performing group YTD was Home Builders with a gain of 22.2%. The worst YTD group was Mobile Home Manufacturers with a loss of -9.7%, respectively. The best stock performers for April were Winter Sports, Inc. (WSKI), up 62% and Foster Wheeler Corp. (FWC), up 61.5%. The worst monthly performers were On Command Corporation (ONCO) and WestCoast Hospitality (WEH), down -30.7% and -15.7%, respectively. The best performers YTD were American Tower Corp. (AMT) and Foster Wheeler Corp (FWC), gaining 88.1% and 81%. The worst performers YTD were Cavalier Homes, Inc. (CAV), down -38.1%, and US Realtel Inc. (USRTE), down -36.2%, respectively. (Please see Realty Corp. Gainers and Losers.)   Top


G. REAL ESTATE MUTUAL FUNDS (REMFs)
Real estate sector funds posted an average total return of 4.02% for the month of April posting one of the best returns of any stock sector. The best REMFs in April were Alpine, CGM Realty and Morgan Stanley with respective overall returns of 10.49% to 9.03%. Since the beginning of the year, REMFs are at a gain of 7.11%. The best performers YTD were CGM Realty and Alpine, with returns of 19.59% to 15%. (Please see
REMFs.)   Top


Stock Changes. Aegis Realty Trust (AER) merged with Phillips Edison Ltd.

Note: In reporting group percentage changes, stocks that were under $1 are excluded from our calculations. If a stock is under $1 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded, and are calculated as of the end of each month.

Disclaimer: The material provided herein should not be taken as endorsements or recommendations to invest in a stock, fund, a group of stocks or other securities. No guarantee can be made as to the expected performance of such investments. Investors should consult all available information, including data external to RealtyStocks and associated Web sites, and exercise own best judgment before making any investment decisions. The author may have equity positions in some of the companies covered in RealtyStocks, which may change from time to time, and will divulge such information upon request   Top


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