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Adopt or Adapt: Learning from Amazon’s Real Estate Approach

At NAIOP’s CRE.Converge this week in Seattle, Amazon Vice President for Worldwide Real Estate Daniel Mallory sat down for an in-depth chat with Jean…

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Amazon’s real estate strategies have stretched and been reshaped over the last decade as the company – like every retailer – strives to expand its reach and get closer to the consumer. The largest developer of industrial real estate in the world, the company has always leaned into the innovation and partnerships that fuel its corporate culture and deepen its impact.

At NAIOP’s CRE.Converge conference this week in Seattle, Amazon Vice President for Worldwide Real Estate Daniel Mallory sat down for an in-depth chat in front of an audience of 1,500 commercial real estate leaders. Jean Kane, former CEO of Colliers International-Minneapolis St. Paul and the incoming chair of the NAIOP Research Foundation, asked Mallory about his perspectives on everything from the company’s sustainability efforts to today’s market challenges to future workforces and beyond.

Here are some key takeaways from their conversation:

  • Look for opportunities of transformation. In times of tremendous growth, it’s important to focus on the future. Lean into the culture and see what changes can be made. And it’s okay to take risks – don’t focus on the potential for mistakes or missteps.
  • Amazon’s goal of being “earth’s most customer-centric company” is more than a tagline. The company is emerging from the pandemic with incredible shifts and a refined attention to these three key areas: 1. Cost to serve and the investment to ship packages, saving the customer money; 2. Speed to deliver packages quickly, delighting the customer; and 3. Defect elimination and avoiding duplication, earning trust.
  • Amazon is in 30 countries and handles billions of packages each year, so it’s critical to focus on local needs and assessments while wisely considering global issues: inflation, sustainability, labor and more. The choice to either engage or sit stagnant is an easy one – the commercial real estate community must be at the forefront of contributing solutions to these issues.
  • The company’s climate pledge of being carbon neutral by 2040 is a decade ahead of the goals established in the Paris Agreement international treaty on climate change. Today, Amazon has roughly 6,000 electric vehicles in its delivery fleet and aims to have 100,000 by 2030, along with the ability to run facilities on renewable energy. Sustainability plays a key role in the company’s site selection, facility design and deal development, where Amazon is incorporating green deal language with the goal of innovating with its partners and sharing those successes to improve the next generation of development.
  • Getting closer to customers means thinking outside the box. There aren’t any 60-acre lots ready for a traditional distribution facility close to major urban population centers, so being aspirational and adaptable to streamline delivery is critical – the company just completed a successful pharmaceutical delivery via drone in College Station, Texas – is critical. Looking at takeover and reuse possibilities is another method of maximizing delivery strategies, as well as incorporating a mix of uses into spaces.
  • The U.S. should be considered more than an exporter of ideas. So much growth can come from importing best practices from across the globe and learning from what others have found successful. Applying the best and brightest ideas no matter where they come from is critical to anyone’s success.
  • Post-pandemic real estate requires being nimble. Nobody could have predicted how the pandemic would cripple systems previously taken for granted, like the supply chain. Now, anticipating and scenario planning to navigate the next significant event is a must. Placing confidence in how your company will adapt and thrive – and communicating that to your partners – is something every company should be doing so that no matter where the market goes, you’ve thought through how to manage the crisis.
  • Amazon views the development of its teams as an investment, particularly related to diversity, equity and inclusion goals that have long-term implications on its company culture and the communities it serves. A diversity of ideas and backgrounds is what’s going to drive a company’s effectiveness in any market. The company has a focus on implementing new technologies in the virtual realm, fintech and beyond to reach the next generation.


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This post is brought to you by JLL, the social media and conference blog sponsor of NAIOP’s CRE.Converge 2023. Learn more about JLL at www.us.jll.com or www.jll.ca.

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Stock Bull Market Might Just Be Getting Started, But…

Stock Bull Market Might Just Be Getting Started, But…

Authored by Simon White, Bloomberg macro strategist,

The rally in equities might…

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Stock Bull Market Might Just Be Getting Started, But...

Authored by Simon White, Bloomberg macro strategist,

The rally in equities might have much further to go, based on the positive outlook for liquidity.

It might not seem like it after a seemingly relentless advance and fevered speculation, but the new bull market is comparatively mild versus the postwar past.

Yet that could change. Excess liquidity - the difference between real money growth and economic growth - shows that the stock rally could have much further to go, turning a so-far historically below-par bull market into one that’s above the past average.

There are many reasons why this might not transpire...

As a natural cynic, I’m more comfortable when the outlook is pessimistic (no room for disappointment) versus when it is optimistic (plenty of opportunity to end up with egg on your face when things do go wrong after all). But sometimes the data just isn’t there to support a downbeat view.

That’s the case today. One of the best medium-term drivers of stock returns is excess liquidity. It’s an intuitive measure: when money, which is created by banks and central banks, is growing faster in real terms than GDP, liquidity is left which is “excess” to the needs of the real economy, and which thus tends to find its way into risk assets.

After beginning to rise in the first half of last year, and supporting the equity rally that began in March, excess liquidity has continued to rise. It is difficult for markets to sell off significantly when there is plenty of risk-asset-supporting liquidity sloshing around the system.

Fiscal and monetary policy are conspiring to keep excess liquidity climbing despite the cumulative impact of higher rates coursing through the economy.

First, what has been driving excess liquidity so far?

It has three main elements: inflation, economic growth and narrow money, with the latter responsible for most of the measure’s rise over the last year.

But that’s not the full picture.

Excess liquidity is a global measure, made up of the money and economic growth of countries in the G10, in dollar terms. That means a weaker dollar boosts non-US excess liquidity.

As the chart below shows, it’s the weaker dollar - down over 9% from its September 2022 highs - that has been the biggest driver of excess liquidity.


 
We can blame fiscal policy here. The US’s expansive deficit has been one of the most important longer-term negative influences on the dollar. There is little sign the deficit is about to improve by much, based on (no doubt conservative) Congressional Budget Office forecasts. Government finances are also unlikely to be straitened whoever the next president is, meaning the primary trend in the dollar (DXY) is likely to remain down.

We can also blame monetary policy for the dollar’s malaise and excess liquidity’s buoyancy. The latter looked like it was about to start turning lower last year, but was saved in the nick of time by the Federal Reserve’s pivot in December.

How? On a shorter-term basis (6-9 months), the dollar is led by the real yield curve. The US currency is driven at the margin by the real return of foreign investors in long-term US assets. In the latter months of 2023, the real yield curve had been steepening, as longer-term real yields were rising more than shorter ones.


 
Then the Fed came with its still unfathomable pivot. Shorter-term real yields fell, but their longer-term counterparts fell by more, and the curve re-flattened. What was a strong supportive sign for the dollar returned to being a weight on it – and thus a continued tailwind for excess liquidity.

It’s not just liquidity that could charge the bull market further. The absence of a US recession, which continues to look off the cards for the time being, also bolsters the case that equities should not soon face a steep selloff. Traditional recession indicators have been misleading in this pandemic-addled cycle, but it has become increasingly clear a downturn in the US is now less likely than not.

Furthermore, the rally might be on shakier legs if sentiment and technicals were overly bullish, but they are not yet historically stretched. The net number of stocks making new 52-week highs, the number trading above their 200-day moving average or their upper Bollinger band, and the advance-decline line are all high but have been higher. Moreover, sentiment is net bullish but not at extremes, while retail allocation to stocks is only at its 5-year average.

Leadership is narrow, with only a handful of stocks driving the advance, but there is little historically to show that this leads to sub-par returns. And when markets eclipse new highs, as the S&P did a few weeks ago, it acts as a psychological all-clear that we are indeed in a new bull market. Whether you agree that’s justified or not, the catch-up money that floods the market creates its own momentum.

No bull market comes without risks and this one is no different. The biggest is a recession. While, as mentioned above, that does not look likely in the near term, a sudden and unanticipated economic slump (either endogenous or due to an exogenous shock) would decimate returns. Also, a bull market that does not begin either during a recession or within 18 months of one is unusual, with only one postwar example (1966).

Equities experience their largest drawdowns in recessions, and given there is little ex ante to indicate one is coming in the current environment, it would likely be particularly devastating.

A blow-off top is another risk. Even then, despite the upset one would cause, it might not be enough to kick-start a new bear market. Inflation, too, will pose a risk to stocks, but to their real returns, unless price growth’s revival is particularly abrupt or steep (bull and bear markets are, sub-optimally, based off nominal returns). A persistent bear-steepening of the yield curve would be the sign the rally is at risk.

To misquote John Templeton, bull markets are born on pessimism, but they grow on liquidity. As long as excess liquidity is supported, the market is primed to keep grinding higher, regardless of how cynical you might be.

Tyler Durden Tue, 02/27/2024 - 14:40

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Fed And Treasury Ensure Dollar Downside Is Ahead

Fed And Treasury Ensure Dollar Downside Is Ahead

Authored by Simon White, Bloomberg macro strategist,

The Fed’s pivot in December and the…

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Fed And Treasury Ensure Dollar Downside Is Ahead

Authored by Simon White, Bloomberg macro strategist,

The Fed’s pivot in December and the Treasury’s willingness to run persistently large fiscal deficits will lead the dollar to resume its downtrend from 2022 highs.

Dollar strength seems to be in vogue again, but fiscal and monetary policy will conspire to make that trend unlikely to persist much longer. Running pro-cyclical fiscal deficits, not just in the US but across much of the developed world, has become the norm. Electorates’ expectations widened after the pandemic, and now there is an unwritten pact between governments and their voters that they will underwrite a growing itinerary of risks from job loss to disease – the Treasury put.

Large fiscal deficits are a long-term negative for the currency as they are inflationary, and considering the US deficit is one of the largest in GDP terms, it poses greater downside risk to the dollar versus other currencies. This will also be a tailwind for the new bull market in stocks.

But shorter-term leading indicators are also dollar negative. On this horizon, the real yield curve gives one of the best leads on the dollar, by about six-to-nine months. This is where the Fed’s pivot comes in.

The real yield curve had been steepening last year, as longer-term real yields were rising more than shorter-term ones, due in part to the influence of rising term premium. That would have anticipated a rising dollar. The real yield curve then began to re-flatten, which continued even after the Fed performed its verbal volte-face in December, as longer-term real yields have risen much less than short-term ones.

The DXY index is up ~2.3% this year, versus the average of 1.4% in the first two months of the year (data back to 1980). But the dollar typically sees all its net gains in the first three months of the year (1.7%) versus an average decline of 0.9% through the remainder.

Net positioning in the dollar is flat, leaving speculators free to move with or against it. They should favor the latter, and not be deterred by recent dollar strength (which is fairly unremarkable), and instead look to the seasonally negative latter three quarters of the year, given extra credence by fiscal and monetary policy that will continue to be a headwind.

Tyler Durden Tue, 02/27/2024 - 12:20

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This Is Nuts – An Entire Market Chasing One Stock

This Is Nuts – An Entire Market Chasing One Stock

Authored by Lance Roberts via RealInvestmentAdvice.com,

“When you sit down with your…

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This Is Nuts – An Entire Market Chasing One Stock

Authored by Lance Roberts via RealInvestmentAdvice.com,

“When you sit down with your portfolio management team, and the first comment made is ‘this is nuts,’ it’s probably time to think about your overall portfolio risk. On Friday, that was how the investment committee both started and ended – ‘this is nuts.’”

 – January 11th, 2020.

revisited that original post a couple of weeks ago as the market approached its 5000 psychological milestone. Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate.

Even one of the “always bullish” media outlets took notice, which is notable.

“In a normal functioning market, Nvidia doing amazingly is bad news for competitors such as AMD and Intel. Nvidia is selling more of its chips, meaning fewer sales opportunities for rivals. Shouldn’t their stocks drop? Just because Meta owns and uses some new Nvidia chips, how is that going to positively impact its earnings and cash flow over the next four quarters? Will it at all?

‌The point is that investors are acting irrationally as Nvidia serves up eye-popping financial figures and the hype machine descends on social media. It makes sense until it doesn’t, and that is classic bubble action.” – Yahoo Finance

As Brian Sozzi notes in his article, we may be at the “this is nuts” stage of market exuberance. Such usually coincides with Wall Street analysts stretching to “justify” why paying premiums for companies is “worth it.”

We Can’t All Be Winners

Of course, that is the quintessential underpinning for a market that has reached the “this is nuts” stage. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.

However, as shown, numerous companies in the S&P 1500 alone are trading well above 10x price-to-sales. (If you don’t understand why 10x price-to-sales is essential, read this.) Many companies having nothing to do with Nvidia or artificial intelligence, like Wingstop, trade at almost 22x price-to-sales.

Again, if you don’t understand why “this is nuts,” read the linked article above.

However, in the short term, this doesn’t mean the market can’t keep increasing those premiums even further. As Brian concluded in his article:

“Nothing says ‘investing bubble’ like unbridled confidence. It’s that feeling that whatever stock you buy — at whatever price and at whatever time — will only go up forever. This makes you feel like an investing genius and inclined to take on more risk.”

Looking at some current internals tells us that Brian may be correct.

This Is Nuts” Type Of Exuberance

In momentum-driven markets, exuberance and greed can take speculative actions to increasingly further extremes. As markets continue to ratchet new all-time highs, the media drives additional hype by producing commentary like the following.

“Going back to 1954, markets are always higher one year later – the only exception was 2007.”

That is a correct statement. When markets hit all-time highs, they are usually higher 12 months later due to the underlying momentum of the market. But therein lies the rub: what happened next? The table below from Warren Pies tells the tale.

As shown, markets were higher 12 months after new highs were made. However, a lot of money was lost during the next bear market or correction. Except for only four periods, those bear markets occurred within the next 24 to 48 months. Most gains from the previous highs were lost in the subsequent downturn.

Unsurprisingly, investing in the market is not a “risk-free” adventure. While there are many opportunities to make money, there is also a history of wealth devastation. Therefore, understanding the environment you are investing in can help avoid potential capital destruction.

From a technical perspective, markets are exceedingly overbought as investors have rushed back into equities following the correction in 2022. The composite index below comprises nine indicators measured using weekly data. That index is now at levels that have denoted short-term market peaks.

Unsurprisingly, speculative money is chasing the Mega-cap growth and technology stocks. The volume of call options on those stocks is at levels that have previously preceded more significant corrections.

Another way to view the current momentum-driven advance in the market is by measuring the divergence between short and long-term moving averages. Given that moving averages smooth price changes over given periods, the divergences should not deviate significantly from each other over more extended periods. However, as shown below, that changed dramatically following the stimulus-fueled surge in the markets post-pandemic. Currently, the deviation between the weekly moving averages is at levels only previously seen when the Government sent checks to households, overnight lending rates were zero, and the Fed bought $120 billion monthly in bonds. Yet, none of that is happening currently.

Unsurprisingly, with the surge in market prices, investor confidence has surged along with their allocation to equities. The most recent Schwab Survey of bullish sentiment suggests the same.

More than half of traders have a bullish outlook for the first quarter – the highest level of bullishness since 2021

Yes, quite simply, “This is nuts.”

Market Measures Advise Caution

In the short term, over the next 12 months, the market will indeed likely finish the year higher than where it started. That is what the majority of analysis tells us. However, that doesn’t mean that stocks can’t, and won’t, suffer a rather significant correction along the way. The chart below shows retail and professional traders’ 13-week average of net bullish sentiment. You will notice that high sentiment readings often precede market corrections while eventually rising to higher levels.

For example, the last time bullish sentiment was this extreme was in late 2021. Even though the market eventually rallied to all-time highs, it was 2-years before investors got back to even.

Furthermore, the compression of volatility remains a critical near-term concern. While low levels of volatility have become increasingly common since the financial crisis due to the suppression of interest rates and a flood of liquidity, the lack of volatility provides the “fuel” for a market correction.

Combining excessive bullish sentiment and low volatility into a single indicator shows that previous levels were warnings to more bullish investors. Interestingly, Fed rate cuts cause excess sentiment to unwind. This is because rate cuts have historically coincided with financial events and recessions.

While none of this should be surprising, given the current market momentum and bullish psychology, the over-confidence of investors in their decision-making has always had less than desirable outcomes.

No. The markets likely will not crash tomorrow or in the next few months. However, sentiment has reached the “this is nuts” stage. For us, as portfolio managers, such has always been an excellent time to start laying the groundwork to protect our gains.

Lean on your investing experience and all its wrinkles.” – Brian Sozzi

Tyler Durden Tue, 02/27/2024 - 08:11

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