Easy Money >>> FOREX

This column was originally published on RealMoney on Feb. 8 at 8:53 a.m. EST. It’s being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

The bidding war for Equity Office Properties (EOP) finally came to a conclusion yesterday, but will this also bring to a close the incredible price run for commercial real estate properties and REITs? Some believe this record-setting $39 billion buyout will mark the top for this sector, which, as measured by the iShares Dow Jones Real Estate Trust (IYR) , has gained some 90% over the past two years.

REITs have obviously performed well, but one of the biggest price drivers has been takeover activity, which has pushed valuations to frothy levels. With the Equity Office deal complete and the bidding for Mills (MLS) nearing a conclusion, one has to wonder if, now that returns on investments are less attractive, the takeover activity and the accompanying rise in prices will cease.

The End Is Near, Not Here

However, many analysts argue that while the boom may indeed end eventually, the time is not now. In fact, some make the case that the cash buyout for Equity Office, which takes it private, will spark the shares of many other publicly traded REITs.

They point out that nearly half of Equity Office’s shares were owned by funds with a dedicated allocation to the sector, meaning that about $18 billion needs to find a new home quickly. In addition, Equity Office was the second-largest component of the IYR, representing 4.8% of the exchange-traded fund.

Some evidence of this reallocation could be seen yesterday as shares of Vornado (VNO) , the loser in the bidding war, jumped almost 7%.

There certainly seems to be plenty of money still looking to be invested in commercial real estate companies, but I believe the gains in price will slow. In fact, I see a good chance for a pullback at some point in the next few months.

Options Play Can Deliver Returns

Without trying to time the market too finely, here’s one way to play the scenario of further near-term price gains followed by a correction. You could use options to employ a form of a calendar spread in the IYR.

Specifically, I would look to buy the March $96 calls for about $1.25 per contract and simultaneously sell the same number of contracts for the September $100 calls for around $3 per contract. This creates a diagonal calendar spread for a $1.75 net credit.

The position would benefit from a near-term rise in the share price of IYR. The plan would be take profits on a near-term rally by selling the March calls before their expiration and remain short the September calls on the belief that IYR will not go much above the $102 breakeven point, or about a 10% rise from current levels.

If you want to avoid having a naked short position, you could buy a higher-strike call in the September options to create a vertical spread. This would be a limited-risk bearish position.

Since both the calendar spread and the vertical spread are net credit positions, they would both benefit from time decay — that is, you could profit even if shares of IYR remain around current levels or even move moderately higher but remain below $100 before the September expiration.

With gold headed back toward its highest level in decades, why are so many gold fund managers holding so much cash?

Take Frank Holmes, chief investment officer at U.S. Global Investors in San Antonio. His $250 million Gold Shares (USERX) held 16.4% in cash as of Dec. 31, while the $1 billion World Precious Minerals (UNWPX) had 14.5% of its assets in cash at year’s end.

While it might seem like a fund with that much money on the sidelines would have missed out on gold’s rally of 20% from its low of around $560 an ounce last October, Holmes says it has provided much needed flexibility.

“What happens is that when the stocks really get clobbered, I have the money to buy them,” the fund manager says.

In particular, when prices fell back in the second quarter of last year, he used the funds to increase his stake in miner Goldcorp (GG) , currently the top holding in both funds. He also bulked up on Randgold (GOLD) .

Holmes’ cash levels have actually come down from the end of the second quarter of last year, when they reached 28% for Gold Shares and 20% for World Precious Minerals. Because investors tend to chase performance and buy at the top of the market, he had a lot of new money to put to work at exactly the wrong time. In May of last year, U.S. Global Investors was raking in up to $50 million a day from both retail and institutional investors, most of it into the two precious metals funds.

So Holmes let the cash pile up.

He’s not alone in his penchant for cash. Other specialty gold funds also seem to hanker after the green stuff as much as the yellow, albeit to a lesser degree. The Fidelity Select Gold Fund (FSAGX) held 11.9% of its $1.5 billion in cash at the end of 2006, down from almost 15% in March.

Other than cash, the fund’s top holdings at year’s end included Newcrest Mining, Meridian Gold (MDG) and Barrick Gold (ABX) .

And as recently as June, the $1.1 billion First Eagle Gold Fund (SGGDX) had 14% of its holdings in cash and other short-term, cashlike securities, although that figure had dropped to 5% by year-end.

The fund’s largest holding by far is bullion, at 26% of total assets, followed by Newmont Mining (NEM) at 10% and Barrick at 8%.

To put these figures in perspective, the average diversified U.S. equity fund holds 3.94% cash, according to Morningstar.

Fund flows aren’t the only determinant of how much money Holmes keeps in cash. Gold, as he sees it, is a currency, and just as there are times when the dollar or the euro are overvalued or undervalued, the same is true for gold.

The fund manager uses proprietary algorithms to determine when the different instruments have diverged meaningfully from a trend. “We are not Koala bears hugging an index,” he says, referring to penchant of some fund managers to try to replicate the performance of a benchmark.

This strategy has helped Gold Shares and World Precious Minerals log five-year annualized returns of 35% and 42%, respectively, as of Thursday’s close, according to Morningstar.

By comparison, the 44 precious metals funds tracked by Morningstar have five-year annualized returns of 29%, on average.

Market-timing may not sit well with all investors, however. For one thing, you need to have faith that a fund manager can make the right calls. “It’s very hard to do well that way,” says Marc Lipson, professor of finance at the Darden graduate school of business administration.

Moreover, funds that have a lot of cash may not perform as intended in your portfolio. It’s widely accepted that keeping a small portion in commodities, say 5% to 15%, can reduce a portfolio’s volatility. But investors who put 10% of their assets in a gold fund that has 30% of its assets in cash would have only a 7% exposure.

“If my objective is to have exposure to a particular asset, I might not want them to be timing the market,” adds Lipson.

Investors may also wonder why they’re paying an investment manager. Morningstar estimates the average expense ratio for specialty precious metals funds at about 1.4%, compared to the mean cost of 0.62% for all money market funds.

“If you leave a lot of money in cash, then sooner or later someone says, ‘I could have done that’,” says Jeff Christian, managing director at New York-based specialty consulting firm CPM Group. “Fund managers can take a lot of criticism.”

At the other end of the spectrum, there are some gold fund managers who are quite happy hugging an index.

“Our stance is that gold is in a bull market and most human beings are not clever enough to catch all the twists,” says John Hathaway, portfolio manager of the $900 million Tocqueville Gold Fund (TGLDX). “I don’t think any investor is paying me to be a market-timer.”

He says that, as of the end of December 2006, his fund held just 1% in cash. It has logged respectable 31% annualized returns over the past five years, according to Morningstar.

Tocqueville Gold’s largest holding was physical bullion at 7% of total assets, followed by Yamana (AUY) and Goldcorp, which each accounted for about 5% of the portfolio.

HOUSTON: Oil companies are scheduled to report fourth-quarter earnings in a few weeks, and Wall Street analysts are already saying the results will disappoint many investors.

Most energy companies’ stock prices rose steadily in the past few years as oil prices more than doubled since the beginning of the decade, reaching more than $78 a barrel in July.

But with oil prices plummeting, several Wall Street analysts have predicted that large integrated companies, refiners and smaller independent companies will report significant declines in profit next month.

In early Friday trading, crude oil for February delivery rose 82 cents to $52.70 a barrel in electronic trading on the New York Mercantile Exchange after falling $2.14 to $51.88 on Thursday.

“It’s not going to be very pretty,” said Fadel Gheit, senior energy industry analyst at Oppenheimer. “There will be no more record earnings.”

The predictions of disappointing earnings are based on the fact that the average spot price for benchmark crude fell to $60.06 in the fourth quarter of 2006 from $70.56 in the third quarter. And that slide came as OPEC announced two production cuts in two months at the end of last year.

“Everyone is looking for the bottom,” said Michael Rose, director of the energy trading desk at Angus Jackson in Fort Lauderdale, Florida. “But where is the bottom? Is it $50 a barrel, $40, $30? Nobody knows.”

Muhammad bin Dhaen al-Hamli, energy minister of the United Arab Emirates and president of the Organization of Petroleum Exporting Countries, said OPEC would move to prop up prices if necessary, according to the Emirates News Agency. “OPEC will act to stabilize the market if needed,” the news agency quoted him as saying.

But few American analysts seemed to take his implied warning of possible future production cuts very seriously.

“We’re looking at inventories that are very full,” Rose said. “Even if we have a cold snap, we have the reserves.”

Most analysts say oil prices have declined in part because of unusually mild winter weather until recently in much of the United States and Europe and because of conservation efforts by business and consumers.

Even as OPEC scrambles to defend prices by trying to curtail production, most analysts say they believe that the cartel’s effect will be limited. With oil prices having fallen about 10 percent in the past few weeks, several companies have already alerted investors that their feast of riches is over, at least for now.

ConocoPhilips said last week that its refining and marketing margins could drop in the fourth quarter by as much as 25 percent.

Chevron said this week that its average selling price for crude oil had dropped to $52.26 from $63.98 in the third quarter.

BP has reported that its fourth- quarter daily oil production declined in the most recent quarter to 3.82 million barrels from 4.02 million barrels. Part of BP’s problems come from its inability so far to start production at the Thunder Horse platform in the Gulf of Mexico, which was damaged by hurricanes in 2005.

Most of the big producers have been hurt by increased labor and service costs and by declines in oil and natural gas output in mature fields in North America and the North Sea. Many companies urgently need to modernize and otherwise reinvest in pipeline networks and refineries. Meanwhile, the companies’ increasing dependence on finding reserves in unstable areas like Venezuela and Nigeria creates higher security costs.

In recent years, many of those problems were negated by the rising commodity prices of oil and gas and by share buybacks that increased the value of their stock.

Analysts are divided on whether the expected tail-off in energy earnings will be temporary or more lasting. And while they acknowledge that oil prices are basically unpredictable, they say there is little sign of an immediate rebound because U.S. inventories of crude oil are 7 percent higher than the five- year average of 315 million barrels reported by the U.S. Energy Department.

“I think this is a seasonal pullback,” said Nicole Decker of Bear Stearns, who predicts a rebound in the spring.

She said the current drop had pushed oil prices down to levels roughly equivalent to those a year earlier.

Gheit, the Oppenheimer analyst, said he expected further pressure on oil prices. “I see prices drifting lower, barring international crises,” he said, then quickly added, “I would not rule out $80 oil if we invade Iran.”

Gheit said he expected to see the largest earnings declines among independent companies and petroleum refiners because of lower refining margins. He said the refiners like Tesoro, Sunoco and Valero and Frontier could report some of the sharpest drops in earnings.