Two Markets, Two Sets of Fundamentals

by Mitchell Clark, B. Comm.

The stock market is most certainly looking for signs of stabilization in the economy and investors have been happy with the news so far. While unemployment will remain a big problem this year, the stock market is looking beyond this reality.

In China, there are major signs that its economy is beginning to
accelerate once again and Chinese stocks have been on a tear lately.

One U.S.-listed stock that’s a good benchmark for economic activity in China is E-House (China) Holdings Ltd. (NYSE/EJ). This is one of the largest real estate services firms in that country. The company, founded in 2000, sells primary and secondary real estate agency services and operates in more than 30 of China’s biggest cities. Currently, E-House is selling residential and commercial real estate properties in all major regions of China.

The company recently released its first-quarter earnings and they beat consensus estimates on earnings and second-quarter revenue guidance.

According to E-House, its first-quarter revenues were 32.8 million dollars, a slight decrease compared to revenues of 33.2 million dollars generated in the first quarter of 2008. Net income was $7.1 million, representing a decrease of 18% from net income of $8.7 million in the comparable quarter last year.

In a sign that the real estate market is turning up in China, E-House raised its 2009 second-quarter revenue range to between 49 million dollars and 51 million dollars, representing an increase of 14% to 19% over the same quarter in 2008.

According to the company, there is a rebound in transaction volume taking place that began during the month of March. Company management believes that the current uptick in economic activity in China is sustainable and that its core real estate business will accelerate throughout this year.

E-House is a great company to follow even if you aren’t interested in owning the stock. This is a great benchmark firm to keep on your radar screen and it’s pretty clear that this company’s long-term fundamentals are sound.

As we’ve all been witnessing, the stock market seems to be trading like it’s a separate system from the Main Street economy. The market is only interested in the future and changes in market pricing occur lightning fast. The real estate market is kind of like the stock market’s opposite. The business cycle in real estate takes a lot longer to unfold and market prices move in long-winded waves.

The two, however, can’t ignore each other forever. Eventually, the health of the real estate market is required to maintain the health of the equity market. Right now, investors are betting on a better future. This enthusiasm can’t last forever, unless the underlying fundamentals are strong enough to back it up. The real estate market is recovering, but there’s still a long way to go before another bull market develops.