Real estate dilemma

There has been a drastic change in the real estate space - many of the bigwigs have touched their 52 week's low and some have gone doen below their listing prices.

Firstly, in the recent months post Jan 2008, if the major falls are observed they are preceeded by a crash in the real estate index. This may be due to some conceptions that the real estate stocks are trading far above their fair PEs. But I would attribute this more to the FIIs - almost all the FII have real estate stocks like DLF, Unitech, Parasvanath etc in their portfolio. These form a major component in thier portfolios and with these FIIs selling off the first indication comes on the real estate index.

Second being the fear that real estate prices would come down drastically in the coming months in Mumbai and Delhi (20-30% in topslap and 10-15 % in middle tier real estate assets). Yeah, this may be a possibility but the major real estate companies are mainly focusing on Tier B and Tier C cities as the development of a township gives far higher returns than some highly priced apartments in A+ cities).

In any case there is no justification that the stock prices falling almost 50%. However, these are more robust companies than any other because land remains the limiting factor in the Indian scenario. Infact the next craze would be REMF (Real estate Mutual funds).

The future of Indian equity market is not as gloom as it appears. Yes we had a fall of more than 500 points on the Sensex and many of the so called big corporated are reeling under selling pressure trying to gauge new all time low (or 2 week low) as the case may be.
But the story dosen't end here - lets analyze little things. The Indian economy is the same as it was a month or six months ago. No fundamentals have changed that much to have a drop of 50% or so. It just as good a concoted story as the 20k euphoria was.

The reasons - cited are a) rising oil prices , b) inflation, c) global equity crisis (this was supposed to have started with the sub-prome) d) lower GDP growth rate than forecasted.

Let's analyze them one by one:

a) oil prices - read my previous post. Also note that commodities is now at its peak undergoing a boom - similar to the equity market we had six months back. Like all things that which has gone too high will ultimately bust and even out. The question remains when ? Not too far from now - 3 months would suffice.

b) inflation - stupid indexes invented by morons have been used to gauge inflation. Its more of a number game - and some technical junkies use these to defend their statement. All such indices try to measure the inflation are grossly off the mark and many of these does not take into account seasonal changes niether do they discount abrupt price jumps of particular products.
Will post a detailed analysis in my next post.

c) Yes the US had a poor growth may be on the border line of what is defined as quote unquote "Recession". The unemployment rate has risen to 5.5%. But what the heck! Emerging economies provide far better return than the developed counterparts. What if the investment banks & insurance companies sell of in US ? Where the hell will they place that money ? Will they invest ? Yes. Where ? in growing economies and commodities. Aye no more in Gold ... Gold story is gone for the the time being. There you see the cycle - equitues, gold, commodities ...

d). GDP growth does have an impact - but its applicable only to the long term story. The nature of investment of FII is most cases do not adhere to such pronciples.

More to come later ...

Oil: is price hike justified?

International Energy Agency: Oil supplies sufficientWalid Khadduri Al-Hayat - 18/05/08.

In its monthly report that came out last week, the International Energy Agency (IEA) announced that oil supplies were sufficient and that the primary cause for the current big hikes in prices are the result of the attempts by industrial countries to secure sufficient oil reserves along with meeting domestic consumer demand. The International Energy Agency represents oil-consuming industrial countries in international economic circles.The IEA also indicated the growing calls to increase oil supply as the price of oil reached $125 per barrel. But do we really need more oil? The answer to this question according to the IEA lies in the fact that a closer look at the balance of supply, demand and future risks, it becomes clear that the reason behind the price hike is the increasing demand and not supply shortages.The report also indicated up to date data and forecasts confirming a surplus in oil markets during the past two months. It expected this surplus to persist throughout the year in case OPEC decided to maintain the same level of production. The IEA also added that demand rates in the US are dropping gradually and expected this decline to continue, and the same with the patterns of high demand in China and the Middle East.However, it also pointed out that consuming countries are calling up on OPEC to increase production to reduce prices. This is true, according to the IEA, since increasing production will raise the level of available reserves in consuming countries which in turn will lead to improving the performance of refineries and hence the prices of oil products. OPEC, however, asserts that supplies in the market are sufficient and that the current situation suits the increase in reserves.The IEA concluded its discussion of the subject by confirming that the past 18 months have been dedicated to the discussion of the subject: are the oil reserves of consuming countries sufficient, and is the timing of the decision to raise the reserves appropriate? It is generally believed that the market can only express its need for sufficient reserves through price. Hence, if supplies allocated for reserves run short, prices increase, and if a few consuming nations insist on a certain level of reserves, they would have to compete against consumer demand which in turn would raise prices.In addition to reserve levels, the IEA also added another factor influencing prices, namely the perceptions of traders in futures, that is, speculation.In this context, it is worth referring to what the IEA casually mentioned, namely the impact of speculations on the rapid price hikes. The New York-based Integrated Oil Update bulletin indicated that crude oil futures dealings (speculation) at New York's NYMEX and London's ICE were up from about $9.5 billion per day five years ago to almost $86 billion barrels a day last year, then to $140 billion per day earlier this year.Once again, these figure are a reminder of what OPEC ministers continue to say and confirms the credibility of their claims and arguments, namely that the record hikes in oil prices are not caused by supply shortages, and that a major factor behind these hikes is the element of speculation which does not take into consideration the demand and supply market fundamentals but rather responds more to rumors and future political and economic fears more than any other element.Speculators and investors benefit from positive or negative price speculations, depending on the nature of their investments and bets, and market dealers increasingly respond to reports published by research departments at financial institutions such as the report recently published by Goldman Sachs which warned about the possibility of prices rising to the $150-$200 range within six months to two years.