Agora Financial’s Rude Awakening

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Dubai, UAE

• America goes up for sale…so who made the calls?
• Seeking profits when prudence and resources are equally scarce,
• Plus, the world’s largest building, refinery, publicly traded company, passenger airplane, movie industry and more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

Over the weekend, your editor found himself marooned in Bahrain after three of his connecting flights from Paris back to Dubai were either delayed or cancelled altogether. Not one to waste time, we immediately rallied a nearby group of Indian businessmen and headed to the airport’s Sky Lounge for a few beers.

After the obligatory exchange of cricket news, the conversation veered towards economics.

“In India, a few of us knew the American housing market was in trouble long ago,” one of the gentlemen offered.

“So did some others,” we replied, recalling Addison’s speech from Vancouver, back at the beginning of our trip. “What tipped you guys off?”

“We run a telecom company, you see. It gives remarkable insight into the future trends of the American economy.”

“Go on,” we nudged, eager to hear the scoop.

“Well, about two years ago there were at least 100,000 Indians in call centers across our country - employed by U.S. banks, mind you - whose sole job was to cold call the bank’s customers to offer them refinancing on their home loans. You know, low interest teasers, adjustable rates and that kind of thing.”

“Yeah,” another fellow jumped in eagerly, “and these guys make about eighty calls every single night.”

“At least,” continued the first. “That’s 8 million calls to American mortgage holders every night, selling their banks’ crappy, repackaged loans to them. Anyone could have seen that scenario ending in tears.” 

“Wow. That’s very impressive,” we nodded. “These call center guys must be having a hard time selling those risky loans now though, huh?”

“Sure,” another gentleman laughed. “That’s why they’re making calls on behalf of collection companies now.”

“Yeah, don’t worry about them,” the first man assured us. “They’ve got more work than they can handle.”

The problem, of course, was not the deluge of calls on behalf of America’s sweetheart lenders enticing Americans to take easier, riskier loans on their homes. After all, these guys were merely responding to a demand in the market…a demand for both savvy sellers and idiotic buyers.

The crux of the matter, as is almost always the case, is that people wanted something for nothing. They wanted to sell their house out from under their own family and buy the big screen TV and go on the fancy vacations. In the end they had so little equity left in their homes that they were basically renting their own residence. Then, when the landlord kicked them out on their backside, they acted like the place they already cashed in was still theirs.

You can’t expect to do nothing and get something for it, as the old saying goes. But the somethings and the nothings in life have a way of evening themselves out in the long run. Pretty soon the do-somethings get what they deserve and, as many in the west are only now coming to know, so to do the do-nothings.

In the column below, Chris Mayer of Mayer’s Special Situations offers some insights into the opportunities presented in this troublesome age of risk and scarcity. [Following is an edited, condensed version of the speech Chris gave at this year's Agora Financial Investment Symposium in Vancouver. If you would like to hear the full conference, including all the specific plays divulged in the explosive breakout sessions, you can grab a copy of the audio set right here.]

Please enjoy and, as always, send your comments to the address below…

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A Golden Age of Opportunity
By Chris Mayer

When you have a lot of problems you also have a lot of opportunity. I want to start with some wise words from John Templeton. Templeton actually died a few weeks ago at the age of 95. His is a great story.

Born and raised in rural Tennessee, Sir John was the first person in his town to go to college. He went to Yale during the great depression and when things got tight, his father could not longer keep him there. So he helped pay his own way through college with his poker winnings, which sort of adds to his legend. He eventually went on and won a Rhode Scholarship, went to Oxford and set up in Wall Street in 1937.

Now, you can imagine what the world look like in 1937; a lot of bad news, the great depression, war looming on the horizon. And in this environment of chaos, Sit John got to work.

One of his famous bets came to him in 1935 when he bought 100 shares of every stock trading for less than a dollar in the NYSE. He made four times his money in the next four years. That was sort of a pattern throughout his career. He was always an investor who was able to find the opportunity during
times of market upheaval. He famously bought stocks the day after the ‘87 crash, for example. He also bought airlines after 9/11 and made a lot of money in a short amount of time. So I think he is a good investor to focus on these days because, as investors, we have so many problems to deal with in the marketplace.

I also want to say he started his famous fund in 1954 and it was incorporated in Canada because there was no capital gains tax here at the time. And during 1954 – 1992 he racked up an average return of 15% a year. That’s a great track record over a long period of time.

He also offered a lot of phrases that we take for granted as common sayings today. “‘It’s different this time,’ are the most expensive words in the English language” - That’s Templeton’s. Maybe his most famous saying is, “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” He later added that the best time to buy is during points of “maximum pessimism.”

When I think of Templeton’s influence on me, I think of two things. One is that he was one of the first really successful investors to invest overseas. He was an early investor in Japan, for example, and he drove home the idea that a quality investment idea doesn’t have to be large, US blue chip company. He was equally at home investing in South Africa, Australia, Japan, wherever. The second thing I think of is that he had this focus on finding great opportunities even when markets seemed like a really bad place to be.

He wrote this when he was approaching his 95th birthday: “Throughout history, people have focused too little on the opportunities that problems present, both in investment and in life in general. The 21st century offers great hope and glorious promises. It is perhaps a golden age of opportunity.”

Now, you might think he’s nutty saying that. And when you look, there is a lot of bad news out there. I think the US economy is probably in recession and Wall Street is a disaster. The dollar is in the tank, debts are high and taxes are going up. My state of Maryland, for instance, just passed the largest tax increase in state history last year. That is pretty amazing considering all the things people get hit with nowadays. And now we are getting hit with higher taxes too. California also had an increase in taxes by some large amount, and Sacramento already has higher taxes than NYC. So to top it all off - as if that’s not bad enough – it’s also an election year! So we have to listen to all the politicians tell us how they are going to solve our problems with wave of their magic pen. 

For this conference, the big issue is scarcity. When you think about how the prices are of everything from food to gasoline are rising, you might think we face scarcity in a lot of things. This may or may not be the case. One thing we don’t have scarcity of, however, is paper money. The money and credit growth for the last 12 months is really incredible. The Australian dollar, the Canadian dollar, the Chinese Yuan, the euro…all these currencies are increasing at 22%, 21% 18%. The only major currencies that are not increasing at a double-digit rate are the Japanese yen and the Swiss franc. So, when we look at market prices, this distorts what we see.

For example, let’s look at oil. Every time I hear that oil is in a bubble, I think of this chart [below]. Basically what it tells you is that as money supply increase, the price of oil has increased along with it. In fact, roughly 87% of the increase in crude oil can be explained just by the increase in money supply. So when you see oil make this huge jump, you have to put it in context. This is true for all commodities. It looks like we have skyrocketing prices, but what we are in fact seeing is the collapse of the dollar. It is just another factor that makes investing difficult, another factor we have to consider.

But we also have real demands; it’s not all just monetary. We do need more energy. We need more oil, more gas and more clean water. In addition, we also need more roads, bridges, pipelines, off shore rigs and more skilled people. Infrastructure is a big word, but in addition to new demand, there is an awful lot of need for replacement. This is a theme that doesn’t get as much airplay, but it’s really just as important. As Matt Simmons, author of Twilight Dessert, likes to say, rust never sleeps. He makes the point that over two decades of low oil prices, much of the industry deferred a lot of
maintenance.

As Matt points out, the whole oil and gas infrastructure is a vast spider web of steel. There are over 335 thousand miles of pipelines in the US alone. There are over 100 refineries in the world as well as thousands of tank farms, gas stations and oil and gas wells. The entire value chain is built of steel, and steel begins to corrode the day is cast. The risk of failure, of leaks and breakages is high. If the world wants to continue using energy, its assets need to be rebuilt. It’s a simple law of nature. The construction job will rival the building of the entire WWII war machine, the Marshal Plan of rebuilding Europe and the post WWII interstate highways systems…combined.

So it is an enormous amount of replacement of what we have and what we’ve already built. This is a big opportunity in the years ahead.

The other reason we are seeing such increased demand for all of these things is that the global economy is shifting its center. Here are some interesting facts from an author name Ferrez Zagawriteit. Just look at some of these. Some are silly and some are important, but together they paint a pretty stark picture:

· World’s tallest building – Dubai, UAE
· Largest publicly trading company – Beijing, China
· Biggest refinery - Under construct in India
· Largest passenger airplane - Europe
· Largest investment fund on the planet - Abu Dhabi, UAE
· Biggest movie industry - Bollywood, India. (Not Hollywood) 
· Largest Ferris wheel - Singapore
· Largest casino - Macau. (Macau actually just passed Las Vegas in gambling revenues.)
· The Mall of America in Minnesota was once one of the largest shopping malls in the world. Now it doesn’t even make the top 10.
· Only 2 of the world’s riches people are Americans.

Interestingly enough, the US would have topped all these categories only 10 years ago…and there’s more that keeps coming on this front. I just wrote down a few more recently. For example, I read an article about how the space programs of other countries are catching up with the US. India, for example, just launched a record number of satellites. They launched more in one month than any other country that has launched…ever. Another example is the millionaire study by Merrill Lynch and CapGemini. They found that there are more millionaires being created in Asia then anywhere in the world.

And the list goes on…

This year, 70% of the money raised on the world stock exchange came from emerging markets. Last year it was only 45%. This stuff is happening now. You see it. I think in the future we will look back and think how it should have been obvious that China was going to be in power and it should have been obvious that India was going to be a big economic force.

Really, you have a choice. With all this bad news and all this bad stuff happening, you can basically cry and give up, or you can try to figure out where the opportunities are.

In Part II of this presentation, I will focus on two dominant themes: The high cost of energy - which is just one problem creating some exciting opportunities - and the booming overseas markets. To make it a little more fun and interesting, I am going to offer a long and short idea, inspired by my friends at the Rude Awakening who recently conducted a pair trade exercise where people submitted one thing they like as a long idea and something they like as a short idea. We’ll take a look at that next.

[Joel's Note: Tune in tomorrow when we present Chris’ long/short pair trade for your consideration. In the meantime, I’d encourage you to check out Chris’ investment service, Mayer’s Special Situations. In addition to offering an ongoing study of the investment greats, Chris’ service also presents some truly out-of-the-box opportunities that you can capitalize on today. For example, here’s a report detailing how you can start collecting “Chaffee Royalties” through a program that’s only recently reopened to new investors.

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[Rude Endnote: We arrived home after our lengthy, though highly entertaining, layover in Bahrain to what looked to us like a new city of Dubai. During the month or so while we were away, the metro line across the street from our apartment extended out of sight. There are four new buildings (that we can see) under construction in the marina and a multitude of new shops have opened in and around the Jumeirah Beach Residence complex, where we live.

As we look over our balcony to the frenetic construction below, one thing remains constant: thousands of Indian, Pakistani and Bangladeshi workers haul materials in ant-like lines, building Dubai’s bubble economy from the ground up.

When the oil dries up and the Middle East is left with thousands of buildings in the desert, these industrious workers will pack up their bags and move on to the next boomtown. And, for many of them, that place is likely to be a lot closer to home.

Right now, the exchange rate between the UAE’s dirham (pegged to the US dollar) and the Indian rupee allows these workers to send a chunk of their pay home. But that spread is contracting and the conditions become less and less favorable every time the Gulf Cooperation Council banks are forced to cut interest rates in line with the US Federal Reserve.

“I’ll be here as long as I can send money back to my family,” our taxi driver told us on the way home from the airport.

“But it’s getting harder and harder. When it gets too expensive, I’ll go home myself. There are more and more jobs for me there…and the pay is getting better too.”

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com