Wednesday, May 03, 2006
Tallest Buildings As Leading Indicators
Chartists Are People Who Have Given Up...
I remember reading a piece given to me by a private banker about 5 years ago on how the construction and completion of each of the world's tallest building always coincide with a major equity market collapse. I also remember that the article was written as a matter of fact but there was no attempt to explain why it correlated?!! Today, I came across a similar article by Peter Kendall and Steve Hochberg, analysts with Elliot Wave International. Cannot really blame chartists for not trying to explain as its not in their make-up. Chartists are a wonderful bunch of people for the stockmarkets. Imagine a group of people at a fun-fair whose aim is not to go and enjoy the rollercoasters but to time when the rollercoasters would dip and rise. Chartists are like that in that they have no real interest in trying to explain the fundamentals of the equity markets. All they are interested in is getting to the best correlation and patterns of movements of stocks. If the time of when the moon shines directly on the Big Ben is 95% correlated to the daily trading high of Johannesburg Stock Exchange, thats all a chartist would want to hear - nobody cares why that is so.
So, in my opinion, true chartists are people who have given up trying to understand equity markets. They don't even bother because it is too difficult or its not necessary at all. Maybe its the people who rely on fundamentals that are in the wrong grouping. Maybe stocks cannot be fully understood, it is after all a mixture of euphoria, elation, panic, mob mentality, .... how to truly put that into a logical equation.
Anyway back to those tallest buildings (I should know cos the Petronas Twin Towers is very close by). First, the Empire State Building was started during the euphoric 1920s and finished during the Great Depression. If we are concerned about an upcoming global decline, we might look around the world and ask if are any super-tall buildings under construction? Unfortunately, there is, and the biggest and tallest is the Burj Dubai, designed to be the world's tallest building, now under construction in the Persian Gulf city-state. So what has happened since contruction started? Well since December last year the Dubai Stock Exchange have lost 54%.
Three landmark buildings in New York City - the Chrysler Building, the Empire State Building, and the Manhattan Company Building [40 Wall Street] - remain as tangible reminders of the enormous ambition and exuberance that characterized the era. All three buildings were conceived in the bull market and built through the peak, only to open for business amid the worst office-space market in decades. Each time it was the tallest building then, and each time it opened to down-trodden markets.
The signal to sell is given when the tallest building is conceived/begins construction, the buildings usually will be open for occupation in the "worst of time", usually in the midst a major correction. This was proven true again for the Petronas Twin Towers in Kuala Lumpur, as the twins were started in 1994 and completed in (you guessed it...) 1997. Oh what a year... 1997!
The next tallest building belonged to Taiwan where the Taipei 101 was scheduled to be completed in 2004. A similar end befell Taiwan in 2004. Now, its Dubai's turn, and maybe now there are too many followers of "tallest buildings" as leading indicator because the UAE Stock Index collapsed the moment construction started on Burj Dubai, and its not even completed yet.
Still, no one has attempted to explain the linkages. My explanation is simple: It is a mixture of excess liquidity and egos. You would never get countries like the Philippines or Thailand or even Holland thinking of erecting the world's tallest building. It takes certain prerequisites - your economy must have been thriving; you should have gone through a massive wealth creation period either through real estate / currency / equity markets; and you have a shallow personality that you have a big ego that needed to be satisfied - you want people to know how well your country/city has done. So, in a nutshell, too much money mixed with ego and some brain power deficiency. That spells for an economy / markets / assets that have overshot.
You would only think about conceiving a world's tallest building if all financial aspects are looking rosy. Needless to say, when our egos start making financial decisions, ... its froth, ... its a bubble that needs to be pricked. So when is the next tallest building besides the one in Dubai.... I believe the Shanghai one is due to open just before the Olympics, or am I wrong? De ja vu baby!