The American Spending Mindset

Correspondence between me and my brother in law.

Hi Fonz,

I have done a lot of thinking about your thesis of inflation fuelled by the unquenchable desire of the American consumer. Please don’t see this debate as rude, but I am trying to flesh out my own thesis on the markets so I think we will both benefit from this discourse.

Although I am attracted to the underlying logic of your claim; yes deductive logic seems to point in the direction of lower interest rates = increased spending, my suspicious mind is telling me rather that it doesn’t always have to be this way. There must be a point of saturation whereby the desire for future spending reaches a point of zero marginal utility, or maybe even negative-“mu”. I would like to propose that comparing the US consumer to the Japanese consumer to support your thesis may be a red-herring.

If I understand your hypothesis correctly, you are saying that the American is not like the Japanese consumer, if an American is given “easy money” he will spend it, whilst a Japanese consumer has an in-bread saving mentality.

In order for me to do this debate justice I need to do a lot more research, I believe I need to research the Japanese Deflation story, if you know of any good books on this subject I will be most grateful. My sense is that one needs to understand the Japanese psyche and its relationship with money more clearly. Yes they may be savers on a consumption level, but I “think” they are uber-investors on the other hand. A deeper understanding of their attitude to money is therefore in order. As a side note, I believe they have fallen for the exact same “bubbles” as have the Americans with their Stock and Real Estate Bubbles in years gone by.

Here comes my gut-feel thesis. I think it will be worthwhile for me to do more research on this before calling it my thesis, but let it stand as such for now.

The American public through the ages has had varied attitudes towards money, it has had periods pre The Great Depression of consuming and investing excess, it has followed The Great Depression with periods of cautious saving. In essence the general mood of the American people, and their attitude to consumption and investment has varied through the decades in large cycles often longer than decades.

A further question I wish to pose in light of this theory is, “Does it matter whether over-valuation is caused by excess investment or consumption?” Is money not money, and the impact of its velocity agnostic to its form? Does the cause of a bubble have any bearing on the mindset of the public (investor/consumer)? This too is worth exploring from a Behavioral Finance point of view, do people with lots of toys and gadgets and homes feel better than investors with a large profitable investment portfolio. My cursory comment would say from a mental accounting point of view the consumer will feel better off as he has experienced the joy of his consumption whereas the investor has only enjoyed the ephemeral benefit of a profitable investment portfolio. This statement on its own would seem to support your hypothesis, but I believe all one can deduce from this understanding is the degree of the bubble. I would say that the bubble of a consumption led over valuation is prone to be far bigger in size than an investment led one.

Before wrapping this mail up I think we need to bring one further wrinkle into the equation, i.e. the effect of globalization. Does it in fact matter what the American attitude towards credit is? Yes the major portion of the US GDP comes from the consumption spending of the American investor. This to a large extent is caused by the profits the American based companies are making. I don’t know the answer to this question but I suspect a large part of these profits are being driven by the current “perfect storm” being experienced in the global economy with demand for American products enjoying record appeal. What if the central banks of the global economies take a more cautious approach to inflation and tighten the money supply.

In conclusion I would like to say the following:
There is every possibility that the current growth phase in the US economy is likely to continue unabated.
There is every possibility that the current inflation in the US is on the verge of an explosion.
There is every possibility that the current growth phase in the US economy is about to end with a recession and possibly a depression.
There is every possibility that the current inflation in the US is about to reverse into a cycle of continued deflation as the asset bubbles created in stock and real estate portfolios – pop.
The only thing I believe we can forecast at this stage is the probability of each scenario.


I hope this is a coherent dialogue, I am at gym in the coffee shop and I am expressing my thoughts freely without too much contemplation.

Regards


Mickson

By the way we TOPPED

As we topped in late July the bounce of the last week has convinced most people we are out of the woods.

Yesterday the markets topped, again (wave 2), and that includes my beloved REITs.

Hang on this can get quite nasty.

MIND POWER

Last night I went to talk by John Kehoe's protégé Robin Banks.

The talk was about 'being happy' and I can honestly say that the talk was entertaining, thought provoking and motivational. Robin ended his talk by saying that motivational talks have a poor track record of lasting beyond the actual talk - they are typically feel good sessions.

I have not read the book Mind Power so it will be unfair of me to criticize the book, I will confine my critique to the Robin Banks presentation last night 5 September.

Whilst the talk was informative and convincing I feel Banks left the audience in the lurch; to be fair he did give 1 tool we could take away to help us achieve our objective of happiness. To this regard he speaks about responding to bad things with a dramatic "….. that is so fascinating!"

So in short I think the strategy he provided us with will once again amount to nothing but a feel good talk because putting the ideas in to practice is the crux, but he doesn’t equip us with tools to implement.

Now I may be unfairly critical because he speaks about a 4 week course which includes practical exercises.

I would like to suggest what I believe the talk is lacking in.

The subconscious mind is far stronger than the conscious mind, therefore the only way to develop a strategy of change is to work through the subconscious mind in conjunction with the conscious mind.

Here is where neuro linguistic programming (NLP) comes into the picture; working with just 1 mind is a waste of time as the self control and discipline required is beyond most of us. The way to effect change is to re-programme the way we think subconsciously together with conscious programming.

In conclusion if Robin Banks programme is combined with NLP I think people will walk away changed people FOREVER.

Too Much Analysis???

Let me say that for some reason when I am making money and the markets are working in my favour I seldom keep up to date with my daily journal. However, when I am in the headlights or I am in two minds about a position I write like someone possessed.

It is at these times (going through one since last week) where I cannot stop analyzing every emotion and trying to define the meaning of life. Is this an advantage or disadvantage?

I think to myself Hedge Fund Manager XY, YZ & AB are real pro's and they never seem phased or 'waste' too much time getting deep and worrying about the stuff I contemplate. They seem to just get on with the job. Am I a sabotaging my chances with all these thoughts.

Let me try and answer this myself.

Firstly, I am not just your average guy, I am an intellectual, I ask questions and I have PhD in Economics to show for it.

Secondly, I am extremely competitive and driven to succeed. So part of all the analysis is to help formulate a strategy to beat the next guy or lets just call it the market.

Thirdly, I am someone committed to being a better person, and part of that commitment is better understanding all the things that make me tick, under all circumstances.

Fourthly, I am human and part of being human is finding fault in the things we do, so over analyzing is just part of being human.

Fifthly, the guy who is a pro definitely analyzes his situation and is honest with his mistakes, but the pro doesn’t dwell on his mistakes he gets on with the show.

Lastly, I have chosen a style that takes time to manifest. I am a medium to long term value trader therefore my calls are almost always early and I have to endure periods of stormy seas. Yes I could block all self analysis out and hope that my original work is what will save the day but that isn't necessarily the answer. In short I have chosen a style that requires patience and yes, analysis, so that when I make mistakes I can learn from them and hopefully never do them in the future. Also the greatest tool in my trading style is my brain and its ability to track my emotions. If I never kept a detailed analysis of my thoughts I would have no means to monitor and improve myself.

AAHHHH that feels better.

Mickson

EXTREME HYPE - OOHHHH this is going to end badly.

The Property Prance
04 Jul 2007 - Finweek -
IntroSome of the wealthiest property investors in Britain, Europe and the Middle East have hit town ready to bulk up their global portfolios with large investments in prime South African real estate
The bigger players have billions to spend. And they're not averse to aggressively outbidding South African buyers for what they perceive to be highly undervalued commercial and leisure property assets. First prize for most of those investors is to buy directly into single, mixed-use developments that offer a combination of retail, office, hotel and residential opportunities - deals that have the potential to become another V&A Waterfront, Century City or Melrose Arch.
But some are also making a play for JSE-listed companies with sizeable underlying property portfolios: gaming/hotel operators and corporates alike. Foreign investors aren't necessarily interested in the core businesses of such companies - it's more about stripping out the underlying property assets. Talk is that a number of offshore players are keen to get their hands on the large tracts of undeveloped land owned by the likes of Tongaat-Hulett and AECI.
To date, the biggest single property deal in SA involving foreign investors was the sale of the V&A Waterfront to British-based London & Regional Properties and its Dubai partner, Istithmar PJSC, in September last year for R7bn.
Both London & Regional - recently rated by the London Financial Times as the biggest privately owned property company in Europe, with assets of around R100bn - and Istithmar want to increase their exposure to SA property.
Finweek hears that London & Regional is already negotiating an offer to buy another iconic SA development: Melrose Arch. Industry insiders place a value of at least R3bn on the trendy, mixed-use precinct just off the N1 north of Johannesburg.
London & Regional is also rumoured to be one of the suitors eyeing listed casino/resort operator Gold Reef Resorts. Earlier this year, London & Regional was involved in unsuccessful talks with Peermont Global, another SA gaming/hotel operator.
Gold Reef Resorts recently said that it was in talks with three or four "selected" parties that could result in a buyout offer for the entire company. Mvelaphanda chairman Tokyo Sexwale, together with Durban-based businessman Vivian Reddy and US-based casino group Harrah's, are other likely bidders.
Casinos in the Gold Reef stable include Gold Reef City (south of Johannesburg), Garden Route (Mossel Bay), Golden Horse (Maritzburg), Goldfields (Welkom) and a majority stake in Casino Mykonos (Cape West Coast). The deal is estimated to be worth R10bn. It will be interesting to see to what extent SA buyers will be prepared to match or exceed the bids of their offshore competitors.
Meanwhile, Dubai-based Istithmar subsidiary Leisurecorp earlier this month announced it had bought Pearl Valley Signature Golf Estate and Spa in the Cape Winelands. Leisurecorp isn't disclosing what it paid for Pearl Valley or how much it will spend to turn the 170ha development into a major international golfing resort. However, Leisurecorp CEO David Spencer says the acquisition was a "significant" investment, both in terms of the initial price paid and the development plans it hopes to implement.
Spencer says it's likely that Istithmar and its real estate investment arm will be involved in more deals in SA. Says Spencer: "SA is currently one of our leading target markets, partly because of the growth in the country's leisure and tourism sectors and partly because of the boost we expect from the 2010 Soccer World Cup."
Lehman Brothers, one of the US's biggest investment banks and asset managers, has also recently entered the fray via a joint venture with JSE-listed Madison Property Fund Managers. Though the deal hasn't yet been officially announced, a large tract of land on the outskirts of Cape Town has apparently been bought for R500m to develop a mixed-use retail, office and residential precinct comprising bulk space of at least 100 000sq m.
Then there's Kuwaiti developer IFA Hotels & Resorts, which is expected to announce a major acquisition within weeks. It's not unlikely that IFA has its sights on AltX-listed golf estate developer Acc-Ross.
IFA's SA-listed arm already owns stakes in other golfing estates, including Zimbali Coastal Resort (near Ballito on the KwaZulu-Natal north coast) and the Cape Winelands estate Boschendal. IFA also recently entered the Namibian hospitality market in a R550m joint venture with Ohlthaver & List.
Other foreign players include Irish developer Howard Eurocape, which is ploughing R500m into the mixed-use Mandela Rhodes Place in Cape Town's CBD. Offshore private equity funds are also starting to tap into SA's commercial property market.
An Irish consortium recently appointed SA corporate finance outfit and designated AltX adviser Bridge Capital to place around R1bn in directly held office, retail and industrial buildings. Ron van der Bos, who together with Tobias Hegele and Jeremy Clark head Bridge Capital's property asset management division, says they've already bought stock worth R300m on behalf of that client. They're in the process of setting up a second fund for the same Irish client and are involved in talks with other British and European offshore consortiums to set up similar property investment funds.
The list goes on. But why the sudden surge in interest in SA's commercial and leisure property assets?
"It's simple. In global terms our market offers value. And with so much offshore money looking for a home, it was only a matter of time before foreign property investors would turn to SA,'' says Arnold Meyer, ex-Broll CEO and recently appointed MD of London & Regional's Africa operations.
Meyer says foreign players have different perspectives on extracting value and structuring transactions. "So foreign players such as London & Regional view SA as a long-term buy."
That does perhaps suggest why international investors are prepared to pay more for prime properties (think V&A Waterfront) than their SA counterparts.
Meyer won't confirm whether London & Regional is bidding for either Melrose Arch or Gold Reef Resorts, except to say that it's involved in "various discussions with various parties". Though London & Regional is a major player in emerging economies, including Poland and Russia, its 50% investment in the V&A Waterfront was its first acquisition outside Europe.
Meyer says SA, and Africa in general, offer double the growth potential over the next five years than any European property market. He says it's likely that London & Regional could have 20% of its assets in Africa within five years.
Craig Ewin, CEO of Old Mutual-managed SA Corporate Real Estate Fund, says there's no doubt that international property players are increasingly looking at emerging markets as the risk profiles of developing economies improve. Ewin says the general view is that international investors can no longer afford to ignore high growth opportunities in emerging economies.
Says Ewin: "South African real estate offers a huge value proposition. Investment Property Databank (IPD) performance figures show that SA's direct commercial property has outperformed all international markets over the past three and five years. Yet we still offer an average income yield that is 200 basis points higher than any other market included in the IPD benchmark."
Madison Property Fund Managers executive director Mike Flax holds a similar view. He says offshore developers regard SA as cheap compared with other emerging markets. "International investors believe SA is now where Poland was five years ago." Flax says in recent years foreign investors have poured billions into Poland's previously underdeveloped commercial property market, unlocking plenty of upside in the process. The same is bound to happen in SA.
Flax says the V&A Waterfront sale has been a major catalyst for further money flow into SA. "The world has suddenly been forced to stand up and take notice of SA."
But it's not only perceived value that's luring more foreign property players to SA's shores. Phillip da Silva, vice-president of operations for IFA Hotels & Resorts in Africa and the Indian Ocean, says SA's highly developed transport and tourism infrastructure is a major plus for international hotel and resort developers.
So too is security of tenure. For example, Da Silva says that SA is far more attractive than Zanzibar or Mozambique, where property investors can't obtain freehold title.
Van der Bos says that SA's well-developed legal and financial framework should also not be underestimated. Even the language factor plays a role. For example, Van der Bos says German investors feel more comfortable entering an English-speaking country such as SA than neighbouring Poland, where language is a barrier.
However, industry commentators agree that the one factor that could slow the offshore scramble for SA property is a growing shortage of investment stock. But that could prompt more overseas investors to go the indirect route via listed property loan stocks and property unit trusts.
Although some may bemoan the fact that SA's crown jewels are increasingly finding their way into foreign hands, Growthpoint Properties CEO Norbert Sasse says the pros of offshore participation far outweigh the cons. "Increased foreign competition for prime SA property assets will help put us on the map as a preferred global investment destination - which can only be positive for our real estate market." Sasse says some of these international players have the vision, money and skills to turn underutilised assets into world-class developments.
But there's also no doubt that foreign interest will push SA property prices up. Flax says increased competition for SA property - both physical and listed - will result in higher prices and lower yields. "However, the positive spin-off is that the expertise that international players bring to SA can only sharpen the skills of our players."
Ewin agrees: "More international investors vying for SA property must affect prices. But if SA wants to play in the international environment, we can't bury our heads in the sand and think we're still going to control our own market."

WESTFIELD DEVELOPMENT OR DESTRUCTION

I have long been a fan of this group, but I think its size is finally going to hurt this behemoth. If this company was just trying to collect the rentals of its vast, superior shopping centres I would be relatively happy. But in order to grow at a superior rate in line with its history it has embarked on an enormous development pipeline.

After 40 years of growing this company I believe the bet on being able to let the new developments coming on stream in the next 3 – 5 years could see the destruction of a large chunk of this company. I give the chances of a global recession into the period in which these developments come on stream around 60%.

Westfield to Raise 530 Million Pounds With U.K. Fund (Bloomberg)

2007-07-02 02:34 (New York) By Garfield Reynolds and Kathleen Chu July 2 (Bloomberg) -- Westfield Group, the world's biggest shopping center owner by market value, plans to raise 530 million pounds ($1.06 billion) by selling stakes in four U.K. malls, giving it cash to build new projects that offer higher returns. The sale means Westfield has raised more than A$7 billion ($6 billion) this year, according to a statement today from the Sydney-based company. Two investors agreed to buy 67 percent of a fund that will buy the stakes and Westfield will market the remainder to a wider group of potential buyers. Westfield is seeking to tap economic growth in spending A$5.4 billion on the construction of 19 malls and plans to start building additional properties at a cost of more than A$9 billion over three years. New malls can deliver greater returns than existing ones. ``This is part of a very smart funding program where they sell more mature assets at high prices and reinvest the money into the development pipeline,'' said Simon Garing, an analyst at UBS AG in Sydney. ``For every $2 billion they spend on development, they make $1 billion of profit.'' Westfield shares advanced 4 cents to A$20 in Sydney, valuing the company at A$35.5 billion. The new fund, Westfield U.K. Shopping Centre Fund, will have stakes in properties worth about 2.1 billion pounds, including Merry Hill, which is worth 1.05 billion pounds.

SUB-PRIME MARKET - what it spells for the future

Alot is currently being written about the recent "blow-up" of 2 Bear Stern hedge funds that have been baled out of a dramatic collapse by their parent BS.

What has been brought to light is the fact that alot of these strucutres do not trade regularly enough for a mark to market valuation to be applied. Because of this artificial valuations and profits are being expressed to the market.

In order to avoid a market price to be used in the market BS has "saved the day" or have they? I believe they have just put off the inevitable. As sure as night follows day there will be an aftermath and the chances are the effect will not be pretty.

It will start slowly (it already has) and day by day the problem will start to manifest, once it is out in the open (FULLY) it will start to fester, and spread all the way up the risk spread curve until its impact is felt by everyone.

This combined with a general re-rating of residential property will start the spiral that will eventually lead the US into the depths of DEFLATION.

By year end everyone and the hairdresser will know about the sub-prime lending market and its ills.

The Life of a Contrarian Trader

I feel the need after a minor incident today to write a book reflecting on the unhappy thoughts and feelings it takes to be a contrarian trader.

Remember as a contrarian trading a large time frame you are likely to be wrong for lengthy periods of time.

I would definitely like to write a book that is semi-fictional describing the life of a contrarian trader, I think there would be a lot of demand for such a book.

I would make it a little bit tongue in cheek but the overiding idea would be to put across the Behavioral Finance principles I have learnt in a practical and humorous way.

Genius or Fooled by Randomness

Am I getting wiser or am I just a genius?I would like to think I am both, let me tell you a little story. Last week Maurice, Charis and I were discussing ways to massage the data that we are feeding our macro model. You see the problem we have is that the data we use is in different formats, i.e. the index is daily data and then we have macro variables that are daily, weekly, monthly or quarterly in format.Can you see that the statistical information we receive MAY be distorted, so our Professor consultant suggested a couple of weeks ago a method of stretching say monthly data to in fact make it look like daily data. There are various algebraic techniques which I will leave for now, and we are in the process of doing the math.On Monday this week whilst discussing a similar issue revolving around how to identify whether the macro variables do in fact have a relationship with the index, I am pretty good at random problem solving, so guess what I threw a "way out there" idea at the team.I remembered going on a course which covered cycles in the stock markets, it works with mathematical formulae that somehow seem to be able to predict certain cycles. The most common of which is called a "Fourier Cycle Regression." Somewhere in the depth of my mind I could see an inclining of a solution through the Fourier regression technique.Naturally as I most probably would have done, Maurice and Charis shot me down, they had vaguely heard of the formulae but knew very little about it and how it could solve our problem.Today we had a meeting with all the people involved in our model development, and after putting forward our problem; our Professor of Mathematics said I think I have a solution. "We need to run Wavelets through our data using 'Fourier Regression" to see where there is 'noise' in the data so that we can sift the good data from the bad. The technique is called "data mining". An example would be used in Physics; picture a laser gun, it shoots a particle and it splits into millions of pieces, now if you wanted to work out from which whole particle this shard comes from you would run millions of wavelet currents through the particle shards to kind of see which ones belonged to who. (I think this is how it works).

Wow did I feel smart having mentioned this idea!!Now coming to my title was my suggestion on Monday with all its naïveté the work of a genius or was it just the random act of throwing out ideas from the base of my limited knowledge?You see it cannot be genius if I have thrown scores of ideas at different problems with only 1 or 2 striking home. So although I believe I am not quite the fool who is tricked into falling for random luck, however I do believe, the genius may just be in the act of continuing to throw way out ideas at different problems, even with a low strike rate.So in the end am I a genius or am I fooled into the belief that coming up with a genius idea for a difficult problem is enough to make me a genius. Could I be both a genius and a fool at the same time, or can I be a random fool or worse just a fool?I think the answer is firstly that I am no genius, however, that doesn't mean I cannot have moments of genius, such as the time above. The message I think is that by continuing to come up with moments of genius, no matter how rare they may be, puts one the path to becoming a genius. So no I am not fooled by the randomness of my genius, I am however encouraged by the fact that I am on my way to becoming a genius.

Mood of the Day

British Land Profit Triples on Asset Values, Tax Gain (Update1) (Bloomberg)

2007-02-13 02:51 (New York) By Peter Woodifield Feb. 13 (Bloomberg) -- British Land Co., Europe's largest property company by assets, said fiscal third-quarter profit almost tripled as the value of properties increased and it got a tax boost after converting to a real estate investment trust. Net income in the three months ended Dec. 31 increased to 1.5 billion pounds ($2.9 billion), or 285 pence a share, from 508 million pounds, or 97.5 pence, a year earlier, the London-based company said in a statement today. ``We have a full agenda for British Land to cement our position as a flagship of the new REIT regime,'' Chairman Chris Gibson-Smith said in the statement. ``The business continues to make good progress and is well positioned for the future.'' British Land was one of nine U.K. real estate companies to convert to a REIT on Jan. 1, the first possible day. Britain's six biggest property companies will have combined tax liabilities of 3.7 billion pounds erased by changing to REITs. That's about four times more than they will pay in conversion charges. Net asset value, the measure used by analysts and investors to gauge U.K. real estate company performance, rose 3.8 percent for British Land to 1,685 pence at Dec. 31 from three months earlier before charges relating to REITs. The third-quarter results included a charge of 338 million pounds to convert to a REIT, equivalent to 2 percent of its assets, as well as a charge of 77 million pounds relating to debt refinancings. In addition it eliminated deferred taxes of 1.65 billion pounds that it will no longer be liable for as a REIT. British Land prelet 54 percent of a speculative development it's building in London's main financial district known as the City, the company said in a separate statement today. Law firm Mayer, Brown, Rowe & Maw LLP is taking 223,000 square feet in 201 Bishopsgate, which is part of British Land's Broadgate office complex. The firm has an option for a further 61,500 square feet in the 408,000 square-foot building. Central London offices are the best-performing type of U.K. commercial real estate. Offices in the West End, the most expensive in the world, returned 32 percent last year, compared with 18 percent for all U.K. commercial real estate, London-based researcher Investment Property Databank Ltd. said Feb. 1. British Land shares fell 9 pence to 1,679 pence in London yesterday, valuing the company at 8.75 billion pounds. The stock has gained 42 percent in the past year.

[TOP]

Liberty International Profit Jumps on Rising Rents, Values (Bloomberg)

2007-02-14 02:23 (New York) By Simon Packard Feb. 14 (Bloomberg) -- Liberty International Plc, the U.K.'s largest mall owner, said profit quadrupled last year as it opened new shopping centers and acquired Covent Garden market in London while the value of its properties increased. Net income increased to 1.56 billion pounds ($3 billion), or 33.9 pence a share, from 366 million pounds, or 30.1 pence, a year earlier, the London-based company said today in a statement. Chief Executive Officer David Fischel is betting Liberty's out-of town malls, the MetroCentre in Gateshead, will attract more shoppers than rival locations and enable the company to raise rents. In August, Liberty paid 421 million pounds to buy the seven-acre Covent Garden site, one of the main destinations for shoppers in central London. ``We are well placed to continue to prosper and to respond to challenges which lie ahead,'' Chairman Robert Finch said in the statement, announcing a 10 percent increase in the second- half dividend to 17.25 pence a share. Net rental income rose 13 percent to 341 million pounds. An increase in the value of its properties added 587 million pounds to 2006 earnings. Profit from derivatives added a further 164 million pound to earnings last year.

[TOP]

Property – Asia

CapitaLand Fourth-Quarter Net Rises to S$456 Million (Update5) (Bloomberg)

2007-02-14 01:49 (New York) By Michele Batchelor Feb. 14 (Bloomberg) -- CapitaLand Ltd., Southeast Asia's largest developer, said fourth-quarter profit rose fivefold, better than analysts expected, helped by a rebounding Singapore home market and divestment gains. The stock rose to a record. Net income increased to S$455.8 million ($296 million), or 16.2 cents a share, from S$93.2 million, or 3.3 cents a share, a year earlier, the company said in a statement to the Singapore stock exchange today. That's higher than the S$129 million median estimate of five analysts surveyed by Bloomberg News. CapitaLand and City Developments Ltd., Singapore's biggest developers, are tearing down old apartment blocks and buying more land as the longest economic expansion in more than five years fuels housing demand. Home prices in the city-state rose 3.8 percent in the fourth quarter, the biggest gain in seven years. ``I'm still bullish on the Singapore property market,'' said Winson Fong, who manages $2 billion at SG Asset Management in Singapore, including CapitaLand shares. ``The economy is doing well, unemployment is low. A lot of projects are going on in full stream, I can't see any particular bad news.'' The stock rose as much as 30 cents, or 4.1 percent, to S$7.55, trading at S$7.50 at 2:14 p.m. Singapore time.

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India Property Stocks Fall After Cash Limit Is Raised (Update1) (Bloomberg)

2007-02-14 02:30 (New York) By Saikat Chatterjee Feb. 14 (Bloomberg) -- Unitech Ltd., India's largest real- estate developer by value, and other property stocks fell on concern mortgage rates may rise after the central bank yesterday increased the cash reserve limit for banks. Unitech fell for a fifth day, its longest losing streak since Dec. 21. The shares fell 10 percent to 373 rupees at 12:40 p.m. on the Bombay Stock Exchange. Parsvnath Developers Ltd., a builder of houses and malls, shed 2.8 percent to 290 rupees. Ansal Properties & Infrastructure Ltd. declined 5 percent to 672.45 rupees. Starting March 3, banks must keep cash equivalent to 6 percent of deposits, compared with 5.5 percent at present, the central bank said last evening. The measure, which will drain as much as 140 billion rupees ($3.2 billion) from banks, is aimed at containing inflation, the Reserve Bank of India said. ``The cash reserve ratio hikes by the Reserve Bank of India further boosts the likelihood of an increase in home-loan rates,'' Suhas Rema Harinarayanan, an analyst with UBS Securities India Pvt., said in a note to clients yesterday. State Bank of India, India's biggest lender, expects lending and deposit rates to rise following the cash limit increase, T.S. Bhattacharya, managing director of the bank, said yesterday. Higher mortgage rates may crimp demand for homes. ICICI Bank Ltd., India's biggest lender to consumers, plans to increase its deposit and lending rates, V. Vaidyanathan, an executive director, said today. Mumbai-based ICICI from Feb. 9 raised its benchmark lending rate by 1 percentage point to 14.75 percent, the second increase since December. ``The low interest rates had been a big driver for the 46 percent compound annual growth rate in disbursements of home loans over the past five years and the consequent near-80 percent increase in property prices in the past two years,'' Harinarayanan said.

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APEXHI the mirror of the US MORTGAGE DEBT STORY

The post below is from a speach John Mauldin delivered in South Africa in January 2007.

What is described below is the exact same story of ApexHi, the way I see it.

Let me give you a preview of a coming scandal, just to illustrate the chase for yields. In the US, about 25% of the mortgages on new homes are what is known as sub-prime mortgages. These are mortgages that are slightly less creditworthy and therefore offer higher interest rates. In the beginning this was a good thing, as first-time owners and those just starting out in life were given an opportunity to own their own homes.

But then came a world of liquidity looking for yield. Investors demonstrated a large appetite for these mortgages. Investment banks would buy those high-yielding sub-prime loans and package them into something called Residential Mortgage Backed Securities. Now, a sub-prime loan is not considered an investment-grade security. But when you put a group of them together into a pool and break them up into various sub-groups or tranches, through the alchemy of high finance, you turn lead into gold. You create high-grade bonds from sub-prime debt. In fact, 80% of those grouped together get a AAA rating, because that tranche gets the first monies paid back to the debt pool. And it probably is pretty safe money. No problems yet.

Then the investment bank starts slicing smaller parts of the pool and eventually ends up with the final 4% getting a below-investment-grade BBB rating. Again, this is all a good thing as it allows investors to buy the risk they want and makes for a more liquid real estate market. But then we start to get cute with alchemy. Not content with turning lead into gold, we start trying to do the magic on sewage.

Investment banks pool all these BBB tranches into yet another pool called a Collateralized Debt Obligation or CDO. The rating agencies have sophisticated models which tell them that with the increased diversification, 87% of these former BBB bonds can now be sold as AAA or AA investment-grade bonds. Only 4% is considered actual BBB debt. So we have taken an original security that is not investment-grade and turned all but less than 1% into an investment-grade bond.
Again, if all those mortgages pay off like they have in the past, then not too much problem. But recent research suggests that as many as 20% of these mortgages sold in 2005 and 2006 are going to default or foreclosure. But the CDOs assume that less than 1% will default. If the number of defaults is even half of that predicted, then someone is not going to get their full capital back, let alone the interest. And we are seeing home foreclosures at record levels in every part of the United States due to the large number of sub-prime mortgages.

Why such a growing default rate? Because investors kept throwing money at mortgage bankers, who found out they could sell mortgages with little documentation. For instance, you could get a loan without actually having to prove your income. So the bankers said, "Let's take the fees and run. Bonuses all around for selling more mortgages." Now there is anecdotal evidence that a small but significant portion of these low-documentation loans had some items that were misrepresented. You know, little things like whether you were actually going to occupy the home.

Who bought these CDOs? Again, my sources say it was primarily Asian and European institutions, which simply looked at the rating on the bond and bought them. There will be lots of finger pointing over this one. Look for massive lawsuits and a major scandal to start up by the end of this year.

Madness Madness Everywhere

You know when every fibre of your being knows that everyone else is mad, but the evidence continues to show you up as the fool, well this is how I feel at the moment.

I open Richard Russells daily letter and it begins,
" January 19, 2007 -- Let's see, what's today's mega-deal? Wait, here it is. Morgan Stanley, the biggest real state investor among Wall Street firms, has just agreed to buy CNL Hotels & Resorts Inc., adding eight luxury hotels and resorts throughout the US, in a transaction worth $6.6 billion. Russell Comment -- Today the retail brokerage business is "small potatoes" for Morgan Stanley. Frankly, I'm almost embarrassed to give a stock order to my broker at Morgan Stanley."

Surely this is unsustainable, each day goes by with another deal announced and each one is done at a price that seems more outlandish than the previous one. Listen to John Mauldin comment on one such buyout (the largest REIT buyout in history) with some help from Charles Dumas from Lombard Street Research,

"Dumas first started talking about the Savings Glut in September 2004. His latest book is titled 'The Bill From the China Shop, How Asia's Savings Glut Threatens the World Economy.' (www.amazon.com)

So why is Sam Zell getting $37 billion at what is under a 5% return on current cash flow?? Because there is money looking for a home and returns. Dumas says US homeowners are borrowing less, so the savings glut means investors have to be and are willing to take less return on their capital. If you are a pension fund or insurance company, you have to put that money to work.

"The foundation of the flood of liquidity in the world (Chart 9 below) remains the Eurasian savings glut, now rising again after stagnating between 2005 and 2006. As long as deficit countries have sectors - business, households or governments - willing to borrow and provide the savings glut with a home, the flow of capital boosts asset prices, providing the incentive to borrow. This virtuous circle is the process that has underpinned Goldilocks. The problem is that it means stable, ontrend growth requires rising debt ratios to GDP."

"Ultimately this has to stop. The exhaustion of the debt capacity in US housing was always likely to be the beginning of the end of Goldilocks. It still looks that way - especially as the resumed growth of the Eurasian saving glut means the deficits to be absorbed by borrowers are now larger. But the slowdown in the US economy has not been a straight-line process, and the enlarged savings glut, and capital flow, is having a peculiar effect, in the absence of the previous US housing boom: it is in a sense forcing stock markets (and commercial property) into leveraged booms in order to create borrowing elsewhere, as the US household credit spree fades."

My take on all this madness is that the chickens will come home to roost and there will be a long period of I told you so, I also think this will happen a lot sooner than people currently expect.

The question I am now asking myself is, this madness does not seem any different to the madness of the tech bubble in the late 90's, yet the story seems to be so plausible to the man in the street and of course many fund managers, investors, and analysts.

So I find myself becoming more and more intrigued by the POWER of the herd, as if it was as obvious as it is to me and I am no great maven on the economy and markets then it should be just as obvious to the experts if not more so. The only other option is that this is not madness but the new world order, which would make me mad.

If it turns out to be the latter then I will have to be the one admitting that I was mad in the end as I should have listened to all the experts as well as the evidence at hand (a continually rising stock market and economy).

Bottom line, trading the markets in its current form is extremely difficult and at the end of the day there has to be one result, that being someone is mad, in this case I hope the masses are madder than me.

Mickson