Jun 2, 2009

Stocks, Property And The Economy

ST June 2, 2009
Exuberance in property sector defies economic

YESTERDAY'S article, 'Private home sellers raise asking prices', raises a vital point that caution is needed, and so far no one in authority has sounded a warning.

Property prices seem to be edging up, and the optimism of sellers seems to be related to the rise in stock prices, which have gone up by more than 20 per cent.

This rise in prices defies economic analysis, as there seems to be no basis to prices going up since fundamentals show that economic growth has been negative. Fourth quarter 2008 statistics show minus 9 per cent and first quarter 2009, minus 14 per cent. So there is no fundamental support for a rise in stock or property prices. Yet most property counters like CapitaLand, City Developments and Keppel Land, as well as other blue chips, have shown appreciation in prices, some as much as 50 per

This prompts the question why no word of caution has come from any chief executive that there has been no fundamental change in his company's earnings in the past two to three months to warrant such a hefty increase in the prices of its stocks. Perhaps they are just revelling in the increase in their portfolios. There has also been no warning from the Stock Exchange.

Obviously, all market players are making hefty profits from their quick short-term trading, so why should anyone rock the boat?

One banker told me it is simply speculation, as there is excess liquidity, and returns on bank deposits earn a pittance 0.5 per cent interest at best, so there is no point keeping the money in the bank; it is better to pledge the deposit, borrow heavily and play the market.

No one is sounding the warning bell, because any true blue businessman knows that when fundamentals do not support values, it is a matter of time before the collapse happens, as prices will ultimately adjust to reflect realistic values.

This may well happen here, unless a strongly worded note of caution is sounded soon.
Anil Bhatia

Of course, the other view is that the economy is actually recovering. That's something that Anil does not seem to have considered, LOL.

It's a widely accepted theory that the stock market is a leading economic indicator. This means that the stock market runs several months ahead of the general economy. The stock market takes a dive before the economy takes a dive, and the stock market recovers before the economy starts to recover. According to this theory, the stock market's current good performance could be a sign that economic recovery is on its way.

Anil's letter almost suggests that there's some conspiracy among market players to prop up the Singapore stock market. Every now and then, I too enjoy a good conspiracy theory. But it's important to note that the current good performance of the stock market isn't limited to Singapore. All around the world right now, stock markets are doing very well, and have been doing very well for the past two or three months.

Two weeks ago, the world saw one of the most spectacular single-day stock market rallies ever. On May 18, the Sensex, India's benchmark stock market index, jumped 17% in a single day. It would have jumped even more, but the heavy buying triggered automatic suspensions, and the "circuit breakers" kicked in to stop trading for the rest of the day.

The Sensex's performance was triggered by the victory of the Congress Party in India's elections. But sometimes what's even more telling is not what the stock markets reacted to, but what the stock markets did not react to.

North Korea, the world's most famous rogue nation, shocked the world by test-firing its nuclear missiles on 25 May. But Asia's stock markets (including South Korea's) continued to rise serenely. Meanwhile, the long-suffering GM Motors announced late last week that it would file for bankruptcy this week. But US stock markets largely ignored this event, and the S&P 500 hit a seven-month high yesterday.


Anonymous said...

It is CASH,my friend,liquidity.

CASH is driving everything like mad,my banks offered me interest free loans,w/o any confirion,except to pay an administrative fee,I took them all.and went into play the market,I do not believe the economy is sound,but if you are free and hv plenty of time,you sure can make small money.

Anonymous said...

I'm guessing that this is more sentiment driven than a real recovery. A lot of cash that was hiding in funds and savings are coming back into the market. Corporate earnings are projected to remain poor well into next year. Retail spending is still very weak in most developed nations. Real estate is still over priced from the 4 years of glut from 2003 to 2007. There are going to be a lot of auctions this summer.

Mr Wang Says So said...

Administrative fee really means that you pay interest upfront, in the form of an administrative fee ....

James said...

I am not so optimistic about a recovery that can justify the rise in price of a private housing. I feel that a big drop in property like the 1990s is looming ahead soon especially if the second depression caused by the inability of america to repay their loans and the lessening of direct foregin investment causd by the new tax laws that are being tabled causing a wave of expats leaving spore shores occur over the next 3-5 years

Anonymous said...

Actually, credit markets have recovered at the end of 2008.

Credit -> Stock -> Economy

Companies get credit to fund their projects, stock prices go up in anticipation of future earnings, and then people are employed as economy recovers.

Anonymous said...

The economies around the world are crying out loud for help.

Governments can't even help themselves let alone the private sector.

Anonymous said...

Actually this rally is a good opportunity for profit taking and to get out. A slowdown in the rate of economic DECLINE or even stabilisation may fuel optimism, but optimism cannot be an indicator of recovery.

hugewhaleshark said...

On a sequential basis the economy is very likely to have begun to turn up in 2Q09. I am talking quarter-on-quarter, not year-to-year as the government numbers are. So it is well-justified that property prices too, should begin to stabilise and show signs of improvement, especially after falling as much as they have. Stocks have overshot on the way down and have shot up simply because of how much they have shot down. The devil as always is in the details.

hugewhaleshark said...

Sequentially, the Singapore economy is very likely to have started recovering in 2Q09. This is quarter-on-quarter, not year-on-year as the government numbers are. So it is quite normal for property prices to start stabilizing as well, especially since they have fallen quite a bit. Stocks have overshot on the way down and are shooting up simply because they were shooting down not too long ago. People like Anil who don't bother digging into the details shouldn't bother to be stock pundits.

Anonymous said...

I personally think that the current rises in the stock markets are merely flights of fantasy. I am no banker or economist. But China, the US and Europe are not recovering yet. What will the recovery of our globalised economy be based on? I believe that most ignored the GM bankruptcy cos it was already long foreseen and priced into the market. And nobody really believes that North Korea would carry out their threat and go to war over sanctions on their ships. It is just rhetoric. They have even lost their closest Chinese allies. They won't even surive round one of a war. Furthermore, their nuclear weapons are not deliverable yet. The most they can do is nuclear self destruction.

Caveat emptor les investisseurs!

Mr Wang Says So said...

See below for ST report on Singapore property market. Seems that when I bought my new place in March, it was probably at or near the market bottom. Wowee, lucky me.

Private home sellers raise asking prices

Jun 1, 2009 - The Straits Times
Joyce Teo, Property Correspondent

PROPERTY market sentiment appears to have improved fast and furious, judging by the prices being asked by some individual sellers - though observers suggest they are being somewhat optimistic.

These sellers may be taking their cue from the stock market, experts said. Asking prices for some properties that have just been completed or are close to completion have jumped significantly in recent months.

The improvement follows strong data for new private home sales, which have crossed the 1,000-unit mark for three months in a row since February, after a period of severe stagnation.

Property experts said the recent strong rally in the stock market has given quite a lift to property market sentiment.

Still, lower prices have also played a part in stronger sales. Some recent launches have done well after developers finally cut their asking prices.

For instance, Parc Centennial in Kampong Java Road is now sold out, after developer EL Development relaunched the 44 remaining units at an average price of $1,175 per sq ft (psf), about 20 per cent lower than last year's average price.

But individual sellers are tending to raise, not lower, prices. For instance, some sellers of high-floor units at Marina Bay Residences are advertising their properties at $2,000 psf or more - regarded by analysts as a key resistance level for many buyers.

Some recent classified advertisements in The Straits Times for Cosmopolitan in River Valley show asking prices of $1,380 psf to $1,395 psf, compared with asking levels of about $1,250 psf earlier in the year.

In late February, an ad for RiverGate units displayed prices of $1,118 psf to $1,399 psf. But last week, some ads for RiverGate, at Robertson Quay by the Singapore River, offered units at prices starting from $1,380 psf, with one ad even offering two three-room units at $1,900 psf.

Some sellers, with an eye to the longer term, are actually withdrawing properties from the market, sensing an uptick in sentiment. 'We are seeing some sellers changing their minds to sell, seeing that the market is rising,' said Savills Residential director Phylicia Ang.

HSR Property Group executive director Eric Cheng said the property market has performed beyond expectations in the past three weeks, but is starting to slow a tad as sellers retreat and wait for better prices.

vincent said...

actually i'm curious on how is the actual market demand and supply. singapore resident population is going to decline this year. but more new supplies of property are coming into the market. are those buying into the property market speculators or real residents. share market movement up and down are mainly driven by the large fund players. they borrow easy money and juz invest in the market. but on the ground, the employment rates do not look that optimistic for the common man. just flip through the straits times recruit and it is easy to have a feel of the situation.

Anonymous said...

Hopefully your borrowing costs remain low. Watch the SIBOR in the coming months ...

hugewhaleshark said...

Good call, MW. Won't have agreed with the analysis, but market is the judge. Good call.

Mr Wang Says So said...

The Hong Kong property market is booming too. Prime properties are selling at the same kind of prices they were selling at, back in 2007. Buyers seem mostly to be from mainland China.

Mr Wang Says So said...

"But China, the US and Europe are not recovering yet. What will the recovery of our globalised economy be based on?"

Well, banks are stabilising and recovering. Lehman, Bear Stearns, UBS, Citigroup, RBS and Merrill Lynch were the biggest losers, but many other banks are now returning to profitability. Or at least none of them are loong that likely to implode. :D

LuckySingaporean said...

Mr. Wang,

When I bought my property in end-1998 asian crisis bottom, I thought I hit the jackpot when prices started to bounce up, talk of economic recovery, etc. The horrid panic appear to be behind us. My property was profitable a few months after I bought so were my stocks. Then they started falling when people realised the economy wasn't that good as thought and property price fell but not at the same rate as when the crisis start. The actual bottom was some distance from the "false" one.

I don't know if we are double dipping this time but it has happened many times in the past. After the rebound euphoria, the real economy does not follow and things fall apart. Take 1929 as a example, the DOW rebounded 50% even bigger that the current rebound only to go into a 5 yr slump after that.

Take some precautions, recovery may not be a one way street. While I did purchase stock from Feb right through March, many of which doubled and a handful tripled, I will be ready to exit if this whole thing shows signs of falling apart.

Donaldson Tan said...

That is the W-shaped recovery the World Bank has been talking about!

hugewhaleshark said...

I think HK will be strong too (though I am not sure about 2007 pricing today)... Money supply from the US flows directly into HK via the currency peg, and most likely straight into property. Can't lose with a well-located unit on the island. No supply, unlike in Singapore!

hugewhaleshark said...

"But China, the US and Europe are not recovering yet. What will the recovery of our globalised economy be based on?"

Let me spell it out for you: SEQUENTIAL basis, not year-to-year.

Anonymous said...


Wise words and obersvations, obviously from experience. What you say will most likely come to pass this time, again, as it almost always does.

Ghost said...

Actually on sequential basis, it's still too early to tell that the world economy is recovering. Signs are good, but a recovery is too early to tell

Anonymous said...

Stock markets are also prone to irrational exuberance as we have learnt. This is still more likely a sideways onsolidation phase, as the market learns the world is STILL not peachy and there are many bumps down the road. Sheer liquidity is driving the market, and perhaps a tiredness of being down, down and down...

Quantitatively, Put-to-call ratio in the SP500 is the lowest since the October 2007 high. Current percentage of stocks above the 200 day moving average is higher than October 2007. Yet 3 months ago, we were staring at a Depression. We have come far too much far too fast.

Today, we see Eurozone GDP as bad as ever at -2.5% q/q. Q1 revised LOWER to -4.8%. US ADP data out at -535k. Further, in the S&P, dividends are largely below 10-year yields, which has not happened even in the Great Depression.

If the current stock market is signalling the economy is on the way, that means we are going to see 5-6% growth in the Singapore economy in 6-9 months?

I truly wish that is that case.

KaiShan said...

Everyone knew that GM was going down, it was quite obvious for months beforehand that they would be filing for bankruptcy, so it was long factored into the market, therefore it was not going to affect prices. Only surprises or unknown outcomes move the market. Also,the market does not move on 'fundamentals'! Only fundamentalists believe that, the market moves on emotions such as hope and fear. Sudden surprises aside, technicals show the herd movemen much better - but then I'm a technician, so I would say that.

Anonymous said...

I was trying to buy a property with the asking price of $1.2 Mio beginning of last month which was verbally agreed. At the same time I need to sell the current property and get approval from the bank for a loan.
While doing all that, the seller then told me that he is raising the price to 1.3 Mio as there was no contract! We were very disappointed.