http://www.gold-speculator.com/ Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris is the editor of Capital and Crisis and Mayer’s Special Situations , a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider . en Thu, 17 May 2012 06:32:19 GMT vBulletin 60 http://www.gold-speculator.com/images/misc/rss.jpg http://www.gold-speculator.com/ http://www.gold-speculator.com/chris-mayer/78925-bar-stool-wisdom-sao-paulo.html Fri, 04 May 2012 20:11:33 GMT “One cannot overestimate the importance of that hotel bar,” says veteran journalist Mort Rosenblum in his handbook for foreign correspondents, Little Bunch of Madmen: Elements of Global Reporting.

The basic idea is that local intelligence has a remarkable tendency to collect in little pools in hotel bars where travelers and locals mix. You can learn a lot on a bar stool talking to a local or even chatting with another traveler just blowing through who you might not get otherwise.

(The title, by the way, comes from a line by H.R. Knickerbocker, a renowned Hearst correspondent from the 1930s, who wrote: “Whenever you find hundreds of thousands of sane people trying to get out of a place and a little bunch of madmen struggling to get in, you know the latter are newspapermen.” I think this applies equally well to those hard-boiled — and successful — investors who love and seek out lonely or forlorn markets.)

I’d amend Rosenblum’s advice to include the airport lounge bar. I was sitting in one in São Paulo, waiting for my long overnight flight back to New York. It was crowded, as everything in São Paulo seems to be. I ordered another Caipirinha, and this Brazilian guy sat on the one empty stool next to me.

We got to talking, and eventually it came out that I was an investor hunting around for ideas in South America.

“You should invest in real estate,” he told me.

“In Brazil?” I said.

“[Expletive] no!” he said. “In the US. Brazil is expensive. Everything is expensive in Brazil.”

I told him he might be the first Brazilian I met who wasn’t gung-ho about putting money in Brazil.

“The problem with Brazil is that it is good, but then it goes very bad. It has always been this way. When it is good, you put your money somewhere else before it goes bad again. Now it is good,” he said. “The problem with Brazil is the Brazilians,” he added with a chuckle.

“I’ve heard that joke before, but it was about Argentina and the Argentines.”

He laughed. “Well, for them, it is true!”

He told me he was with a group buying apartments in New York. They are good buys, he says. He gave me some figures about what his group owns, but since I had a head full of Caipirinhas and it was nearly 11:00 at night, I had no desire to pull out pen and paper and start taking notes. We talked for a while longer, and then our flight began boarding. We exchanged cards and wished each other well.

Of course, now I can’t find his card. But it doesn’t matter. The story highlights an interesting point: For overseas buyers, US real estate is cheap. This influx of foreign capital helps boost the prices of US real estate, providing almost a floor on valuations.

Recently, I chatted with the co-manager of a Florida real estate fund. He made the same point. There’s been a flood of South American investors looking for second homes and investor properties. In some markets, this is more pronounced than others, of course. The Brazilians, for instance, aren’t buying property in Detroit. But in Miami, yes. I remember reading reports last year about how more than half of all condo sales were to foreign buyers. And for newly built condos, that figure jumped to 90%.

I could be wrong about this, but my gut tells me most Americans still think US property is headed lower. Or at a minimum, they think it is dead money. Investors have a tendency to look behind them. They tend to shun what’s done poorly in the recent past.

There have been some surveys with results in this direction. This from the Real Estate Economy Watch reporting on a survey of US homeowners: “The five-year-long real estate depression has taken such a toll on homeowners that they fear falling values four times more than fires, and they are twice as likely to monitor local prices than their own cholesterol levels.”

Yet even in commercial property, you can get better deals in the US than in comparable markets abroad. In New York, you can get yields on commercial property twice what you could get on comparable property in London (non-distressed). As a result, the money is starting to flow back to the US. This from the Wall Street Journal:

European investors bought $1.6 billion worth of real estate in the US in 2011, more than double the $700 million they invested in 2010, according to data from Jones Lang LaSalle. While the figure is still far below the $8.4 billion bought in 2007, it shows activity is picking up.

It’s an interesting dynamic that sometimes gets overlooked. It also seems to put a floor on high-quality US real estate in big cities where such foreign money might look to park some cash — New York City, Miami, Chicago, Los Angeles and the like.

There is still a lot to do in cleaning up the wreck of the epic bubble. According to the real estate firm HFF, banks have $3-plus trillion of commercial real estate debt on their books:

Banks have approximately $2 trillion of core commercial real estate loans on their books: CMBS [collateralized mortgage-backed securities] account for $1 trillion, and life companies are approximately $300 billion of direct loans maturing throughout the coming decade.

This mountain of maturing property loans will require a lot of refinancing. Given the huge bubble that created this debt, much of this loan pool will also require additional equity. In other words, borrowers are going to have to come up with more money to roll over or refinance the debt. This is the opportunity for investors — Brazilian or otherwise.

Because of those maturing loan pressures, pricing for new investors who want to put money in is not bad. Nobody is stealing properties these days, at least not many of them. There is a lot of competition hunting around US real estate right now. But good values are not hard to find, depending on the market and property type.

I’ve surveyed a number of the larger deals. With interest rates so low, borrowers are locking up 10-year notes on commercial property for 4.7-5.8%. If you want a shorter term, you can get even lower rates. Healthcare Properties did a three-year deal last year at 2.7%. And I’ve seen plenty of five-year notes at 3.6% and 3.7%. It’s a once-in-a-lifetime chance to own property at über-low financing costs.

Property owners on current rents can earn cash-on-cash yields of 6.5% to as much as 11%, depending on the property type, quality and location. That’s better than what you can earn in other assets taking similar risks. And at the end of the day, you own a tangible asset that central bankers can’t print. In fact, money printing probably aids you in the long run, as it eats away at the value of your debt and raises the replacement cost of building your asset (discouraging competitors). Plus, your rental rates will rise over time.

Remember that real estate is cyclical. We just had a huge bubble that peaked in 2007. We had a very painful bust that found its bottom sometime in 2009. We are now in the gradual recovery phase. Investors have begun the long process of refurbishing property, recapitalizing it and refinancing it.

There is still more to do, and there are still good values out there in US real estate. If you don’t see it, you’re too close to it. Just talk to someone in Brazil.

Chris Mayer,
for The Daily Reckoning

Bar Stool Wisdom from São Paulo originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".



Link to the original post... ]]> Chris Mayer RssFeed http://www.gold-speculator.com/chris-mayer/78925-bar-stool-wisdom-sao-paulo.html http://www.gold-speculator.com/chris-mayer/78668-missing-13th-floor.html Fri, 27 Apr 2012 20:32:29 GMT “About eight years ago, I was going down the elevator of a hotel in Las Vegas with a friend of mine,” Arnaud Karsenti told me. “The elevator skipped the 13th floor. And my friend said to me, ‘How come there is no 13th floor? What a bunch of wasted space!’”

The lack of a 13th floor comes from the same fear that prevents people from walking under ladders or causes them to shiver when a black cat crosses their path. But Arnaud decided to make a business out of it. The idea is to find value where others fear to go.

Arnaud is the managing principal and co-founder of 13th Floor Investments. The firm manages the Florida Real Estate Value Fund, which, as the name implies, focuses on real estate value investing in Florida. Recently, while in South Beach, I tried to catch up with Arnaud, but our mutually jangled schedules couldn’t mesh. We talked later by phone a couple of times.

I want to share what Arnaud and 13th Floor are up to, because you’ll get a fascinating ground-floor view of what’s happening in real estate in the post-bust world. There is also much investing wisdom in what he shared. Finally, the Florida Real Estate Value Fund itself is a fine alternative investment idea. (Later in this letter, we’ll look at another opportunistic way to play distress in real estate.)

Arnaud and I started talking about how there can be a big gap between the big picture and the view on the ground.

“There’s been a lot of conflict in the data,” Arnaud told me. “Housing is a great area where you can take out the paper every day and read about pricing going down or unemployment pressures, yet the local data in Dade and Broward counties [in Florida] indicate a reverse trend. One challenge for us is to decide what we believe and try to cut through some of the noise of the big macro stuff to really understand what’s going on.”

To do this, Arnaud and his team rely on the good old spadework of due diligence. His business partner, Robert Suris, is a local developer and contractor with a keen sense of property value. Together, they meet with builders and bank presidents and dig into local markets.

This helps avoid the two big problems with the big-picture statistics: They are backward looking and tend to paint with too broad a brush. Still, Arnaud says there are unmistakable big-picture trends unfolding in real time that are worth paying attention to. He highlighted some important ones:

Housing has bottomed. Housing sales and starts are as low as they’ve been going back to the 1960s. Prices have fallen and interest rates are at all-time lows. In most markets, it is now cheaper to buy than rent. Strong rental yields help set something of a floor under prices. There is still a lot of distressed inventory, which is an opportunity that investors slowly munch away on.

There is a continued influx of foreign buyers. Buyers from South America in particular fuel a lot of activity in South Florida. Arnaud noted they typically pay all cash. They also focus on Miami’s urban core. To a Brazilian, Miami is cheap. While I was in South Beach, I was not surprised to hear so much Spanish. I was surprised to hear so much Portuguese.

Money is cheap. The amount of money sloshing around and the cost of that money drive real estate activity. With interest rates at all-time lows, some rental properties already trade above pre-recession levels. Cheap money won’t last forever, but with the Fed committed to low interest rates to 2014, it seems unlikely to change soon.

A shift from homeownership to renting. The homeownership rate dropped big-time when the bubble popped. After peaking at 69.4% in 2004, the national homeownership rate is now the lowest it’s been in 13 years. There are a lot more renters now, and not only because of the stresses of the bust.

“It used to be that people got married and then they’d move into a house,” Arnaud said. “Now people do that in their 30s. If you look at what people are doing for that extra 10 years of single life, you see that they are spending more time renting.”

Let this speak to the danger of looking too much at past statistics and thinking that they will automatically revert to some magical mean (or average) of the past. “You can’t just pick one statistic and then assume that things are going to revert to the mean because the mean itself changes,” Arnaud said. “Secular changes within a trend can affect the mean permanently.”

I asked Arnaud about how long of a window he thinks we have to pick up bargains in real estate. His answer was it depends on the property type and location.

“In Miami, forget about it,” he said. “Apart from a couple of special situations that we are involved in, I think it is very hard to find distressed opportunities in Miami right now, as most of it has been picked through. The world has decided that ‘Miami is back.’ It’s almost a boom-like feeling. I thought it would’ve haven taken longer to come back. But it’s right here before us now. People are developing everything from condominiums and multifamily to retail and hotels.”

Arnaud’s fund, though, is not purely focused on distressed opportunities, nor is it focused on Miami. “It’s just that distress has been where the most opportunity and action have been in the last couple of years,” he said. “And we’re not focused just in Miami. We have a minority of our holdings in Miami. We’re very active in other parts of Florida, such as Naples and Fort Myers. And we’re starting to get active in Orlando.”

The challenge is to balance value investing principles with growth. “If you read about Seth Klarman’s investing approach, for instance, it’s all about buying below book value, below liquidation value, below replacement cost [or the cost to rebuild].” Klarman, as you may know, is a great investor. His Baupost Group has delivered a nearly 500% return to its investors over the past 11 years, while the market rose 7%.

“If you do your job right as a value investor, you’re going to benefit from the growth whether you like it or not. But if you rely strictly on your value investing lens, you may miss out on some growth opportunities,” Arnaud warns. “Still, as an opportunistic value guy, you have to be able to live with the trains you didn’t catch.”

There are other pitfalls in being too cheap. “One of the dangers of value investing in real estate is buying the wrong product,” he said. “Buying something at a big discount to replacement cost could be a mistake. We just passed on a deal that we could still buy for below replacement cost. But we realized that the reason was the product itself was not a quality product. If you just value everything off a spreadsheet, you can lose sight of some of the intangibles of real estate that drive demand.”

Those intangibles include aesthetic considerations. “The Brazilian guys who come and want to buy property in Miami are only going to buy quality. They are going to buy value, but they also want something that they think is attractive.”

So far, 13th Floor has done a great job navigating the waters. It was early picking up condos in Miami and is now in a position to sell a condo tower for a 36% annualized return. It land-banked a lot of inventory for national homebuilders when no one wanted empty lots. Now 13th Floor is in a position to sell lots to national builders seeking new land, earning annualized returns of 21%, 34% and 29% on three projects. These returns kill what the stock market has done over the same short time frame.

Regards,

Chris Mayer,
for The Daily Reckoning

The Missing 13th Floor originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".



Link to the original post... ]]> Chris Mayer RssFeed http://www.gold-speculator.com/chris-mayer/78668-missing-13th-floor.html http://www.gold-speculator.com/chris-mayer/78485-new-trend-sneaking-up-people.html Tue, 24 Apr 2012 00:24:07 GMT China has lost its edge.

There was lots of skepticism about a piece in my March letter called “The Great Comeback No One Will Believe” *about the revival of U.S. manufacturing as China loses its cost advantage. But I continue to find evidence that the piece was spot on.

I had a good talk with Scott Huff, a principal at Innovate International, which does product development work and contract manufacturing for several industries. Scott’s story is worth passing on because the arc of his career in the last 10 years tells the story better than any set of statistics.

Scott is a design engineer. He started going to China in the mid-1990s to do work for clients. Huff was living in Chicago at the time. Every year, the travel got heavier as more and more clients manufactured in China. “So in 2004, after spending three months in the country in two-week blocks in the first half of the year, I figured maybe I ought to just move here,” Scott recalled. “My wife is pretty adventurous. So we moved lock, stock and barrel to Shenzhen and started rebuilding the business there.”

There were tons of opportunities, and the business grew. Things went well. Then, last year, it started to change.

“In the middle of last year,” Scott said:

I realized it when I was getting price quotes for some injection-molded plastics. Chicago used to be a center of excellence for this, and it’s since been decimated by overseas competition. But there were a handful of the old hands that survived. They kept up with the technology and got very lean and efficient, using electric presses and things like that that reduce cycle times and labor.

He continued:

Suddenly, prices from them weren’t that different from what you could get in China when you factored in transportation costs. It looked better and better as we took another big labor increase in China in the third quarter of last year. Of the last four out of five jobs I quoted for injection molding in the U.S. versus molding in China, the U.S. won. Most people don’t believe me when I tell them I’m getting better prices in the U.S. The first instinct people have, the paradigm that they’ve learned to live with, has been to bid work in China.

Your editor sympathizes with this. I’ve had a lot of people shake their head in disbelief and call me crazy when I tell them it is (sometimes) cheaper to manufacture in the U.S. now. But here you have a real-world tale from a man on the ground seeing this new trend unfold in real time.

“Things are getting expensive in China, pure and simple,” Scott told me. “Labor costs have gone up substantially in China. That’s not a mystery to anybody. The amount of labor available at any price for some jobs is just not there. If you want to polish a piece of stainless steel for the kitchen industry or tie rawhide pet treats, you’re going to have a tough time finding people. People have options. They’d rather put together an iPad now.”

Even though labor costs have surged, one could argue they have not kept pace with the cost of living. “Food prices in China are ridiculous,” Scott says. “It’s a hell of a lot cheaper to live in the United States than it is in China if you equalize people’s incomes. As a percentage of someone’s income, the chunk for food is a huge line item there. Land prices have been skyrocketing everywhere. Apartment prices are through the roof. It is cheaper to live in the U.S.”

Remarkable, isn’t it?

So business is just starting to move away from China. Manufacturers are seeking out cheaper markets in Southeast Asia. Scott has a new plant there already, in Cambodia. “Cambodia is small but in a good location,” Scott says. “Right in the middle of everything, really.”

His company is also moving business to the States. When I caught up with Scott, he was in Knoxville, Tenn. He is still a resident of Shenzhen, China. That’s where he officially lives. But his kids are going to school in Tennessee, and he is looking to build a business back in the States. It’s a complete reversal of what happened eight years ago.

“I don’t think anybody has any idea that’s happening,” I said.

“It’s sneaking up on people, but they’re going to realize it. The handfuls of survivors in the molding industry in the U.S. are busy as hell right now. It’s not just the plastics industry. Anybody that was left here with manufacturing intact is getting extremely busy.”

“So it seems there would be an opportunity in U.S. manufacturing,” I said. Scott agreed, with a caveat.

“There is an issue that we’re battling. The U.S. lost an entire generation of toolmakers. They’re just not there. The old Polish toolmakers I used to work with in Chicago have all retired, or if not, they are more gray-headed than I am. And there aren’t the apprentices ready to step in. You can’t find a good toolmaker in Chicago right now. It’s hard to come up with. And the skill set — you can’t just turn it on and off like a faucet.”

This is something people — especially political types — overlook. It’s not just a matter of bringing back the jobs. The skill set has to be there, and that takes time to build.

“Technology changes, too,” Scott added, “so it is extra hard to find someone who’s kept up with it all. You can still cherry-pick and pull out a tool in Asia and bring it to the U.S. You just have to figure out a way to maintain it without a toolmaker.”

“Wow,” I said, “that’s a complete reversal of what went on before where people would take machines from the U.S., disassemble them and ship them to China.”

“I was one of them,” Scott said. “Now I’m designing products from China and carrying them to Chicago for production. Touch base with me in a couple of months and I’ll let you know how it went.”

I said I would. In the meantime, we’ll continue to watch this story. China losing its once-formidable cost edge would have a sweeping impact on manufacturers everywhere. Stay tuned…

Regards,

Chris Mayer
for The Daily Reckoning

A New Trend “Sneaking up on People” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What is Fracking?".



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