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HFF Research Update for July 6, 2015: Capitulation?

Monday, July 06, 2015

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website or access the HFF Daily Rates App in iTunes.

Times like these make me very nervous, more because the direction markets give us is unclear.

WTI lost almost 8 percent on Monday in a free-fall that accelerated through the trading session and made a native Texan like me shake in his proverbial boots. This feels more like China than Greece, given China’s use of oil is approximately equal to that of the top 10 countries in Europe combined. Another reason this notion carries weight is the selloff in other raw materials, most notably copper.

Analysis of Market Insights and Economic Performance


Below is a YTD look at the commodity’s future contract. I don’t enjoy saying this but it appears the closing bell was the only thing that was strong enough to arrest the drop in WTI prices. That theory will be answered later this evening when overseas markets open in Asia.

Economic Performance July 2015

We heard on the Investment Sales call this afternoon that the most recent drop in the market capitalization of China’s stock market index is the equivalent of Greece’s annual GDP five times over. Below is a graph sourced by Bloomberg showing deleveraging in China’s Shanghai and Shenzhen bourses. According to Bloomberg, margin bets have declined approximately 13 percent since June 18th – the most recent peak in valuation. Meanwhile, the market capitalization of those indices has fallen 31 percent – a $3.2 trillion decimation of value. But Monday marked a turn, with the indices rising 2.4 percent on the day. Is the decline in the stock indices a symptom of declining internal growth, or will it be the cause of same? Or both?

Economic Performance Continued July 2015

On to Greece.

Though citizens of Greece roundly defeated terms proposed for a third bailout, Germany and the ECB remained rigid in providing concessions. While the resignation of Greece’s Finance Minister was enough to help pare pre-market downdrafts, it didn’t last. Investors are suffering from uncertainty towards the path to solution.

But there are indeed signs some of these investments might be oversold. The Euro’s value to other benchmark currencies did not suffer significantly Monday. Some argue the Euro should be weaker given the probability, once only a possibility, Greece will exit the European Union. Conversely, others support the notion the currency is stronger without its weakest link.

Ad interim, equity trading across Europe and domestically did not manifest the attrition experienced in Asia, which many had feared would be carried forward as the new day progressed westward.

Still proving the bellwether among the noise, Treasuries signal caution. With yields down 5 to 10 bps across the curve, it is evident cash is king…if you can get to it. Greek banks extended withdrawal limitations further into a second week.

The yield on the 10-year UST is at an interesting point in time. Precisely equidistant from six months (+35 bps) and twelve months (-34 bps) prior, we should advise clients the bond feels as expensive as it does cheap when compared to recent history. Below is a seven-day look back at intraday yields on the 10-year UST.

Economic Performance Cont. July 2015

In the meantime, if your lender is holding spread, you might think about the delta to market in bps, multiply it times the number of years to maturity and compare that amount to your fee.

In these markets, it pays (literally) to engage a professional intermediary.

About Jimmy Hinton

Mr. Hinton serves as Managing Director of HFF, responsible for the firm’s research efforts. Mr. Hinton works with the HFF Jimmy Hintonexecutive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

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