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Is Apple's New Campus Signaling a Market Top?

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"My guess is that Apple's ridiculously modern building will be yet another obvious sign of the top in hindsight," says one industry observer.

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"Apple (AAPL) is growing like a weed," Steve Jobs recently told the Cupertino, California City Council. "It's clear we need to build a new campus."

Jobs & Co. are planning to erect a four story, 2.6 million square foot structure on 148 acres (98 of which used to belong to Hewlett-Packard (HPQ)), housing 12,000 employees. "It's a bit like a spaceship landed," Jobs offered.





It is a bit like a spaceship landed -- a spaceship with a diameter larger than the Pentagon:



Peter Atwater, Minyanville contributor and president/CEO of Financial Insyghts, sees Apple's architectural ambition as a signal that financial markets are nearing a top.

"The more outlandish the design, the nearer the peak -- just like homes," he explained to me. "Skyscrapers have always been a sign of the top vis-a-vis the markets. My guess is that Apple's ridiculously modern building will be yet another obvious sign of the top in hindsight."

The "Skyscraper Index" was created twelve years ago by Andrew Lawrence of Barclays Bank in Hong Kong, who found a correlation between conspicuous construction and economic crises, telling the Jakarta Globe that the building of skyscrapers "has been characterized by long periods of inactivity intersected by short periods of erratically timed, intense building, typically coinciding with excessive monetary expansion in the global economy."

Lawrence's findings were recently corroborated by Gunter Löffler of southern Germany's University of Ulm.

From the abstract:

This paper shows that construction starts of record-breaking skyscrapers predict subsequent US stock returns. In the three to five years after the construction of a record-breaking new skyscraper began, per annum stock market returns are around 10 percentage points lower than in other years. The predictive ability is significant and relatively stable. It exceeds that of alternatives such as the prevailing historical mean, predictions based on dividend ratios, and recently suggested combination forecasts. The findings are robust against a wide range of specifications. Further analyses show that tower building also predicts international stock market returns. One explanation for these patterns is that tower building is indicative of over-optimism. Widespread over-optimism could lead not only to tower-building, but also to overvalued stock markets. The rational asset pricing explanation is that in periods of low risk aversion, financing of large-scale projects such as record-breaking towers is easier, and expected returns are lower. The explanations are difficult to separate empirically. There is no significant influence of financing conditions or sentiment on tower building. However, unlike in other models studied in the literature, imposing a non-negativity constraint on return forecasts does not increase predictive accuracy. This provides indirect evidence that the predictive content of tower building is at least partly related to overvaluation.

Here's a look at InterActiveCorp's (IACI) performance since the construction of the company's glossy, Frank Gehry-designed headquarters in 2007:



On the other side of the coin, Jones Soda (JSDA) is moving to a new 9,500 square foot HQ in Seattle, which may not help, but certainly can't make things any worse for the beverage maker:



Interestingly, a connection between degraded returns and the size of a CEO's home has also been found.

In 2007, Cornell professor Crocker Liu (then at Arizona State) and New York University professor David Yermack released a study called "Where are the shareholders' mansions?" which found that "future company performance deteriorates when CEOs acquire extremely large or costly mansions and estates."



"We find that CEOs who acquire extremely large properties exhibit inferior ex post stock performance, a result consistent with large mansions and estates being proxies for CEO entrenchment," they wrote. Further, "CEOs in the largest homes underperform their counterparts in the rest of the sample, with the difference in performance lying in the range of -7% to -9%, depending on the performance metric chosen."

Let's take a look at the Blackstone Group (BX).

CEO Steve Schwarzman and his wife live in a $30 million, 35-room, 20,000 square-foot Park Avenue triplex with a gym, steam room, sauna, billiards room, screening room and servants' quarters that include their own dining room, three bedrooms and two baths.

And here's what Blackstone's done since its IPO in June, 2007 -- a 66% loss for anyone unfortunate enough to have bought and held:



According to this methodology, Mitt Romney had better start getting his resume together, as his chances of winning the presidential election have just been dealt a severe blow.

An article published over the weekend in the San Diego Union-Tribune titled "Romney to quadruple La Jolla home size" reveals that:

Romney has filed an application with the city to bulldoze his 3,009-square-foot, single-story home at 311 Dunemere Dr. and replace it with a two-story, 11,062-square-foot structure. No date has been set to consider the proposed coastal development and site development permits, which must be approved by the city.

The former governor of Massachusetts purchased the home three years ago. According to a description from the listing agent, the Spanish-style residence at the end of a quiet cul-de-sac is sophisticated and understated in its décor, "offering complete privacy and unsurpassed elegance."

So does the White House -- not that Mitt Romney (or Steve Jobs, for that matter) will get to find out.

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No positions in stocks mentioned.
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