Friday, April 3, 2009

Baltic Dry - Reloaded: Short China - Short Commodities.

Baltic Dry Index for 2009.
Source: Bloomberg.

Around a month back, I had posted an article about how the Baltic Dry Index can be good source of tracking global growth.
Most directly, the index measures the demand for shipping capacity versus the supply of dry bulk carriers. The demand for shipping varies with the amount of cargo that is being traded or moved in various markets.

Till last month, the Baltic Dry Index has been viciously moving upwards due to great demand in Dry bulk commodities in China. China is the only growth story for such a rise in Dry Baltic Index. But now, it seems that it China demand has been subsided and Dry Baltic has started its downward trend. Its down 35% from it peak in early March.

This is a very concerning issue and implies that China growth will degrade. That will also put a downward pressure on commodity prices like Copper and Oil which have also gone up around 40%.

As said in earlier blogs, US has only one way to get out of this mess and that is via printing money which will add-in to inflation and debasing of Dollar.

So for the short term, there should be a pull back in Copper and Oil prices due to reduced demand for commodities in China. But the debasing and higher inflation will again start the upward trend in commodities. Get ready for the pull back!!

Wednesday, April 1, 2009

Indian Realty to bottom out in 2010.

Analyzing past cycles in India is very tough, as most developers have been listed for less than three years. Macquarie Research drew parallels from past cycles in Hong Kong. While the physical market dynamics in the two locations are clearly very different, the brokerage succeeded in deriving some striking and relevant conclusions.

“In every one of the past four cycles, stocks recovered 6–9 months before GDP growth. This (in turn) preceded a recovery in rents by another 6–9 months. A late-2009 recovery in property stocks should therefore not surprise us. News flow should improve due to the low base effect in volume and price growth, but we do not foresee a smart recovery. We continue to expect that prices and rents in India will bottom in late 2010, 6–9 months after our forecast of a recovery in GDP growth,” said the brokerage firm.

Macquarie believes IBREL and HDIL are best placed. IBREL has a net cash balance sheet. HDIL has no major refinancing requirement or bullet payment due for the next 12–15 months.

At some stage in the next 3–6 months, DLF should start to look very attractive. However, we believe that the value in its projects is unlikely to be realized in the near term amid a lack of clarity on capital raising. Investors should also consider a ‘venture capital’ approach and invest in a basket of survivors to hedge against ‘black swan’ events.


Real Estate Fundamentals.

I cut my teeth as a housing analyst at Kidder Peabody after graduating from Wharton in 1972. I learned that the health of the housing markets is dependent on six key factors:
1. the level of interest rates;
2. the employment setting;
3. the economic setting;
4. demographics (population growth and household formations);
5. affordability; and
6. the relationship of the cost of home ownership to renting.
With public policy targeted at lowering mortgage rates and stabilizing the jobs market and economy (seen by late 2009 or early 2010), a better backdrop for housing is in sight, but what most observers are missing is the current massive improvement in affordability and a major tilt in favor of home ownership over renting.
As seen by the two metrics below, affordability has dramatically improved:
1. Median existing and new home prices divided by median incomes are now at 2000 levels.
2. Median home prices to disposable income (admittedly skewed by higher net worth individuals) is now at 40-year lows.
If the cost of owning a home is no different than renting a home, then the tax, psychic benefits of ownership, and so forth will result in an improving demand component for housing.
Such is the case today.
Setting the Case-Shiller Home Ownership Cost Index to the Owners Equivalent Rent in 2000 to 1.0 times yields the following conclusions:
  • The cost of home ownership in March 2009 is only 13% higher than the cost of renting a home. This ratio compares to a 73% higher cost of home ownership vs. renting at housing's cyclical peak in 2006.
  • If we take out the high ownership cost/rental cost cities of Miami, New York City and Washington, D.C., then the national cost of home ownership is now equivalent to renting.
No doubt, a vigorous recovery in housing awaits improving consumer confidence and stability in the employment and economic picture. These conditions are all dependent on the degree to which policies gain economic traction in the last half of 2009.
Nevertheless, the improvement in affordability and the benefit of home ownership over renting holds even more significance over the near term.