Ray Shan's Online Journal

*Updated on 11-28-06*

*Update 2, fund up: RWX*

Here’s a snap shot of my updated Global Markets Notes/Outlook regarding real estate. Yes, everyone’s saying how the “bubble” (if there really is one) is bursting, but commercial real estate is a completely different ballgame and is more attractive than ever. I’m eager to see the first international real estate ETF go live soon.

• Real Estate
• • Real estate did not and is unlikely to rise/fall with equity/FI market
  • Localization
  • Bloomberg REIT index up 20%+ YTD (11-20-06)
  • ’07 forecast: 50/50 (11-20-06)
  • Residential (11-26-06)
  • • Housing market will be affected by seasonality
    • Residential RE constructions down 17.4% Q3, most since 1991
    • Existing home sales down 12.7% Q3 YOY
    • Foreclosures up 42% since Oct. 05
    • Prices down 1.2% – NAR – underestimated
    • Rising income/cheaper fuel offset declining home values
    • Volume down but prices up in coastal areas
  • Commercial (11-06)
  • • Not highly correlated w/ residential RE: rental/leasing up when construction/new home sales down
    • Rising rents & tighter vacancy rates in future due to:
    • • White-collar jobs are growing
      • Institutional investors’ demand growing for higher return than treasury & lower volatility than equity
    • Blackstone LBO of Zell’s $20B trust (11-20-06)
    • • Largest takeover of RE company
      • More M&A to follow as Blackstone reserves $13B for real estate (11-26-06)
      • Zell accepted 8.5% premium, eager to sell
    • CMBS (11-9-06)
    • • Started in early 90s & currently in high growth mode w/ deals up to $2B
      • High growth & preferred financing structure in South Africa w/ $0.5B underwriting within last 12 months by Growthpoint (11-06)
      • Not highly regulated industry
      • Delinquencies declined Q1~Q3 ’06, largest drop in hotels (61%) due to improved sector health

Gold is just rebounding from the Q3 setback. But what exactly was happening, or will happen to gold, the near-3 trillion dollar industry?

Q2, we have seen temporary easing of physical demand (jewelery market) and very unusual volatility for gold, prices ranging from $567 to $725. This high volatility has not been seen since the mid-80s, and is unlikely to continue as gold is historically not a volatile metal due to ample near-market supply. 

Gold's correlation with other instruments: not highly correlated, particularly with equities. This is one of the best investment attributes of gold, a great diversification tool for modern portfolio theory. 

Out of the 7 gold ETFs, I'm a fan of IAU because of iShares' other products (no I do have a professional relationship with iShares or Barclays). It's up 32% YTD, vs 30%- for spot gold and 10%- for S&P 500. Here's performance of IAU over past 18 months: 

Gold forecast survey by analysts from bulge-brackets and specialty boutiques. As seen here, gold is still outperforming analyst expectations no matter how bad Q3 was:

Also, there was a significant decline in investment holdings of index-linked commodity futures. June's total global assets in commodity benchmarked investments were $120 billion. By October, it has declined to $90 billion. The decline was not only due to the price drop of major commodities, but also "grass is greener elsewhere", particularly equities. 

What's happening in the future? Jewelery accounts for 77% of demand for gold since 2001, and the long term outlook is positive due to rising consumer income, purchase power, favorable demographics (women/seniors) and attitude changes in developing countries. Industrial demands (11%) are also likely to rise since next generation electronics and consumer goods use gold as raw materials.

When comes to supplies, mining (62% of total supplies) activities continue to suffer. It takes 10 years to open a new mine and god knows how many for earth to supply us with new gold. Lowering supplies will cause prices to increase, and increasing prices will stop producers from selling gold forward, or even buying back previously hedged positions. 

Long story short: I'm bullish on gold. 

Sources: LMBA, World Gold Council, SeekingAlpha, Global Insight, Bloomberg

Here's some notes I took today regarding the Latin America economy. The region is looking strong and yes I do own iShares MSCI Brazil Index ETF (EWZ) . Despite some hiccups toward mid-'06, it has performed wonderfully for me. Also there's my updated global markets notes/outlook.

• Stabilization: double-digit economy growth vs. triple-digit two decades ago
• Commodities: 40% of market cap
• Lowering budget deficit
• More attractive FI market: @ same yield @ rating as U.S. FI market, Latin America's rating more likely to be upgraded soon
• Mexico, Brazil & Argentina strong
• More consumer savings & credit (20%/yr)
• Cheapest equity @ <10x earnings vs. >11x in Asia & >15x for rest of developing world
• Strong sectors: consumer/industrial, retail, media, energy