Agora Financial’s Rude Awakening

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Wall Street, New York

• What do China, Saudi, France, Brazil, Qatar and the US have in common? (trick question)
• Investing in booming energy economies in a brand new way,
• All that’s sexy about pumps, valves and motors plus plenty more…

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Eric Fry, reporting from his old stomping grounds…

The “Gabelli Pump, Valve & Motor Symposium” does not sound like the sort of gathering  that would produce sexy investment ideas. Who cares about pumps, valves and motors?

But in a financial marketplace full of self-destructing financial derivatives, there’s a certain comfort in investing in the kinds of things that you can see and touch, and that continue to work year after year. Even so, pumps and valves seem pretty darn boring…and they are. But they are profitably boring, which makes them quite sexy indeed.

Pumps, valves and many other fluid-control components are enjoying a kind of renaissance. The world’s booming oil and gas industries demand these products, as do the world’s water utilities. In short, pumps, valves and motors are hot, as Chris Mayer explains below…

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Getting Pumped
By Chris Mayer

Signs of recession are swirling around the U.S. economy like curls of smoke in a pool hall. Many companies are beginning to struggle. Many CEOs are worried. But the companies that appeared at the recent Gabelli Pump, Valve & Motor Symposium in Manhattan had a very different story to tell. Business is good.

Throughout the two-day conference, corporate execs from over a dozen companies gave their thoughts on the current state of affairs and shared their hopes for the year ahead. In general, optimism prevailed.

Pumps, valves and motors may not sound like hot numbers to you. But these companies operate in that nexus of water, energy, agriculture and infrastructure. Most make things that move and control liquids and gases of all sorts - from oil and water to sealants and chemicals. The menu of what they do spans an enormous range, like that of an old ’50s diner. And business is good.

To get right at a key take-away from the conference: The futures of companies with overseas operations will look much different from those confined mainly to North America. Most warned of slowing business in North America. None complained that anything of the sort was happening in China… or India… or the Middle East.

“China is not slowing down,” reported Edward Campbell, CEO of Nordson, “it’s accelerating.” For Nordson, a diversified maker of too many things to name, orders in China are up 40% in just the last three months. Over the last five years, Nordson’s China business grew at a blistering 27% annual rate.

This theme was a constant throughout the conference.

Flowserve, a maker of flow control equipment, listed project successes in its core markets. Here’s the list. See if it strikes you in the same way as it did me:

•           Hongyanhe and Ningde nuclear power plants (China)

•           Pearl gas-to-liquids plant (Qatar)

•           AREVA Generation 3 nuclear power plant (France)

•           Marathon oil refinery (U.S.)

•           Pulp facility (Brazil)

•           Major chemical plant construction (Saudi Arabia).

What struck me is where some of these projects are: China, Qatar, Brazil and Saudi Arabia. The next thing that hit me was the nature of the projects. Most are all about oil and gas, power and chemical projects. Flowserve talked about the demand for new energy projects, especially deeper and more complex recovery (shale gas, tar sands, etc.). The company also sees heavy refurbishment demand of old infrastructure and for new electrical power. It sees a consistent demand for water projects, including desalination - particularly in Asia.

Economic slowdown? Not in these lines of business. In 2004, Flowserve generated 52 cents in earnings. In 2008, it expects to earn between $5.10-5.40 per share. That’s a tenfold increase!

There were others. A little company called A.O. Smith makes water heaters and boilers for home and commercial use. North American business sags as the housing slowdown takes its toll. China, though, booms. Sales in China were up 25% last year. Capacity doubled in 2007. A.O. Smith will double it again by 2009.

Crane Co., another diversified manufacturer, had a similar story. Three new locations opened up in China in 2007. Crane now has nine facilities in China. All the while, it’s closed locations in high-cost Western countries. A plant in Lindau, Germany, relocates to Szekesfehevar, Hungary. Another one in Long Beach, Calif., heads to Chihuahua, Mexico. Evidence of the great arbitrage dubbed “globalization” in action.

Crane’s exec tells the crowd he’s looked for weakness in the businesses, trying to anticipate a slowdown. “I just don’t see it,” he says.

I wrote to you a couple of months ago about how China contributed more to global economic growth than any other country. It marked the first time since the 1930s that a country other than the U.S. holds the top spot.

Chicago-based economist David Hale adds more color to that fact. Perhaps most arresting is this: In 2000, consumer spending in the world’s 17 largest emerging economies was nearly half what it was in the U.S. In 2007, it was up to 65%. Over the next seven years, consumer spending in emerging economies could top the U.S.’

“The current business cycle,” Hale opines, “will go down in the history books as one that confirmed that leadership in the global economy is now shifting from the old industrial countries to the emerging market countries.”

And finally, think of this: What came to the rescue of troubled U.S. financial firms such as Citibank, Merrill Lynch and Morgan Stanley? It was Abu Dhabi, Singapore and China. Only 10 years ago, it was Asia that needed rescuing. It was U.S. financial muscle that aided Asia’s troubled financial system in the wake of the Asian Crisis. That’s all different now. As Hale writes: “It is a complete reversal of 20th century history.”

So it isn’t as bad as we read in the papers - if you are in the right places around the globe. In general, you’ll want to stick with companies that gain from this history-making shift, not the ones cleaving to the old order of things.

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Rude Endnote: Yesterday our publisher, Joe Schriefer, alerted Agora’s Executive Series members to an opportunity to store their dwindling dollars in an ipso facto energy backed CD. We’ve had a rush of emails from Rude readers, asking if this service is available to them and how they can take advantage of it.

We’ll get to that in a moment, but first, Joe explains why investing eroding greenbacks in EverBank’s New World Energy CD is such a wise move.

“First, it hopes to cash in on falling exchange rates,” explains Joe. “The CD is denominated in three currencies — the Canadian dollar, the Australian dollar and the Norwegian krone (33.3% each). So, your potential returns grow as the dollar depreciates against them. And there’s a good reason to expect these currencies to continue rising against the dollar.

“That’s because Canada, Australia and Norway have something America doesn’t - abundant energy supplies. While the United States has to hold on to every bit of oil, coal, natural gas and uranium it can get out of the ground, these three countries have enough to sell to the highest bidder. The influx of cash gives their currencies a solid pillar to stand on…something the U.S. dollar no longer has.”

We actually ran a link for this yesterday morning, as soon as we heard our business partners over at EverBank had made the CD available. In case you missed it and are looking for more details, you can find them here.

Cheers,

Joel Bowman

aussiejoel@the-rude-awakening.com

P.S.: You’re one of the first people to hear about the brand-new New World Energy CD thanks to our close business relationship with EverBank. We may be compensated if you decide to invest in this or any of their offerings.