Global Real Estate

This week the continent of Europe held its breath as the Spanish real estate market collapsed!  In the span of a few short days, five of the country’s largest real estate stocks fell a staggering 10%!  This sudden and definitive downdraft sent shockwaves throughout the country, and the rest of the continent.

The biggest problem with a market collapse like this is not only the instant wealth destruction it causes, but also the impact it has on other industries.  Like clockwork, the construction industry stocks, who are obviously closely tied to growth in the eal estate market, were hammered.

The real estate woes continued to spread as investors correctly assumed this activity would spread to banks and other financial institutions.  Sure enough, the banking industry was caught up in the carnage because of their widespread exposure to the housing sector.  

All of Europe has been holding its breath over this very issue as for the last several years, as the global excess liquidity has been finding its way into the real estate markets.

If you think the run up in home prices was strong in places like Boston, San Francisco, or Phoenix, you should look at what it costs to live (and buy real estate) in London, Zurich, Paris or Madrid.  All of these locations have seen incredibly rapid increases in real estate prices – and now a sign of weakness has emerged.

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Now, why is this important to US investors?  I’ll tell you why, Spain is not some small backwater little country.  It is now the 4th largest economy in Europe, accounting for almost 12% of the EURO zone GDP.  Add to this a little fact from the Wall Street Journal:  last year Spain added 33% of the new jobs created in the Euro Zone – and most of that was in... you guessed it, construction!

This is scary, with real estate collapsing and impacting other industries, you can bet builders will put the breaks on new building, causing construction growth to slow, ultimately resulting in fewer jobs.  With fewer jobs comes fewer people who can afford to purchase real estate.

Amazingly, the Spanish government is turning a blind eye to this problem. The top economic advisor to the Prime Minster of Spain had this to say, "The risk of a hard landing in the construction sector is nil.  Zero.  I don’t even know what people mean when they talk about risks.”

Now if that doesn’t scare you I have no idea what will.

•  Continuing along the lines of research analysts making broad-based industry calls, JP Morgan shifted their thoughts on the transportation industry – and airlines in particular downgrading: UAL (UAUA), Continental (CAL), JetBlue (JBLU), Alaska Air (ALK), US Airways (LCC), and AMR (AMR).

•  BMO also rolled out new coverage of the energy industry, with a focus on drilling stocks including: Union Drilling (UDRL), Pioneer Drilling (PDC), Grey Wolf (GW), and Bronco Drilling (BRNC) – starting all of them with outperform ratings.

•  Research analysts at Stifel downgraded Amazon.com to a hold from a buy in spite of the great stock performance of late.

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