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?".

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?".

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 Causes Gas Price to Increase?".

I recently read about Mark Lightbown, who used to run the Genesis Chile Fund. Author John Train described him as a quirky and well-mannered Englishman who traveled with a shopping bag full of his effects, on the theory that no airline would ever make him check it.

Anyway, in 1990 after Pinochet stepped down, Lightbown moved to Santiago to launch the fund and take advantage of a potential Chilean recovery. As he settled in, he noticed the number of trucks delivering Coca-Cola to restaurants in Santiago. Digging a little deeper, he found that Coke consumption in Chile was widespread. So he thought, as incomes improved and Chile rebounded, Coke ought to do pretty well.

As it turns out, the local Coca-Cola bottler, Andina, was a publicly traded company. He read the annual report and visited the company. The office was on the ground floor of the bottling plant. It was functional, not an ostentatious Greek temple — a good sign. The general manager, a man named Eulogio Pérez-Cotapos, was pleased to see him. He didn’t get many investor visits. Pérez-Cotapos told him about what Andina was trying to do and that he expected volumes to grow 10% per year and profit margins to improve as more volume improved the efficiencies of the plant.

Sounds like a great story, right? Yet Andina was trading for four times earnings. And it had 60% of the soft drink market in Chile. Lightbown bought a million dollars’ worth of stock. Ten years later — having not sold a single share — his stake in Andina was worth $70 million. That’s a 70-bagger in a decade.

It worked out even better than he hoped because Andina created new products (such as fruit juices) that it didn’t have when Lightbown made his first investment. The fruit juice business actually grew even faster than the soft drinks.

It all sounds so easy now. Of course, buying a Coca-Cola bottler was a good idea! Yet Andina lingered at four times earnings when Lightbown bought it. Nobody wanted Andina. He recalls a local broker who tried to talk him out of buying it. Why? First, the company had not grown for years. As is typical for many investors, the broker looked backward, instead of forward. And second, Pepsi was moving into the market and an advertising war ensued. This made locals worry about sleepy Andina holding up its profit margins in the face of such an onslaught.

This brings us to a counterintuitive point Lightbown makes. “Very few people think in the same terms as a foreign investor.” Which means, curiously, that locals sometimes overlook a great idea because it is in their backyard and they hold certain prejudices that are slow to adjust to a new reality.

I don’t know what happened to Lightbown or the Chile Fund since. It doesn’t matter. The story serves as an example of the power of a firsthand observation — and a simple one, at that.

Today, I doubt such an easy opportunity exists in Chile. It is a fairly developed market these days. But you never know, so I am here to explore a little and see what’s what. One easy firsthand observation struck me as I drove around Santiago. There are an awful lot of cars. Traffic is thick.

Wherever I go in my travels, I can’t help but notice how many cars are on the road. In the last 12 months, I’ve been to South Africa, Colombia, Vietnam, Thailand, Cambodia and now Chile. Buying a car is one of those basic things nearly everyone does when they can afford it. This leads to an obvious conclusion: The number of cars on the world’s roads will continue to rise as the emerging markets close the gap with the Western world.

This brings us to the auto parts suppliers.

Mario Gabelli, the famed investor behind Gamco, is one who gets it. I like the way Gabelli thinks, and I count him among my favorite investors. In the latest Barron’s Roundtable, Gabelli hit on this theme:

On a global basis, about 74 million cars will be sold in 2012, including 13.8 million in the US, reflecting a significant cyclical recovery. There are approximately a billion cars on the road around the world, including 240 million in the US. But the big growth will come from China, which had 8 million car sales in 2007 and will have 20 million in 2013. How can I make money on this?

Well, all those cars need parts. Gabelli likes a trio of plays: Genuine Parts, Navistar and Dana Holding. He didn’t mention Federal-Mogul (NASDAQ:FDML) this time around, but his firm is the third-largest institutional holder of the stock. Clearly, the old wizard likes the makers of parts for cars and trucks. I see a lot of value here, too.

Generally, investors like to go where the growth is. You have that in the automotive world. Growth of production just based on the platforms in place and current expansion plans should be strong out to 2015 in emerging markets. But it’s not like North America is a slouch here, either. North American production should grow nearly 7% per year. Only Europe is really sluggish, at 3.3%.

The problem with growth is that you usually have to pay for it. Not so among the auto parts suppliers. They are all pretty cheap on earnings and cash flow.

And these companies will be sitting in a really sweet spot in the global economy over the next several years.

Regards,

Chris Mayer,
for The Daily Reckoning

Thoughts While Sitting in Chilean Traffic 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?".

“Chris: I see a remarkable contradiction in your latest issue of Capital & Crisis. At the outset, you extol the virtues of [the successful investor Thomas] Phelps, who was an advocate of buy right and hold long, with the rest of your strategies, which seem based on sell half, take profits, and let the rest run. As you publish the bookkeeping on how long you have to stay in on an initial investment, undisturbed, to make a big profit at a given rate of return, why not make an equal effort to bookkeep what happens to your initial investment and final returns when you take half out every time it doubles? Let’s see what it makes you or costs you to do it that way. It seems to me that the take-profits approach is an admission of a lack of confidence in self or the company, but somehow feels like falling down stairs every time you almost reach the top.”

Fair questions.

Let me start by saying that selling is the hardest thing to do well as an investor. I don’t think anyone does it well consistently, and that includes the whole slew of investing greats — past and present — that I’ve studied. Everyone has sold something only to see it rise higher. And everyone has held onto something only to give back lots of apparent gains.

Second, remember that Phelps didn’t say hold onto stocks blindly. He wrote: “My advice to buy right and hold on is intended to counter unproductive activity, not to recommend putting them away and forgetting them.”

Now let’s talk about taking partial profits. At Capital & Crisis, I don’t automatically advise selling half when a stock doubles. I’m against mechanical rules of all kinds. I use our judgment. When a stock is fully valued or close to it, I tend to let it go — or at least a part of it. That’s often the case after a quick double or so. If it is still undervalued, I tend to keep it.

Canadian Natural Resources (NYSE:CNQ), for example, has doubled twice for my subscribers over the time I suggested buying it. But I have never suggested taking any money off the table. This is simply because CNQ has tremendous assets in the ground, and I don’t think the stock has ever fully reflected that value. Another example: Ensco doubled, but I did not suggest selling half. Instead, I suggested closing out the entire position for a 132% gain after it made a big acquisition I didn’t like.

Sometimes, selling half is costly, as you say. Selling half on GTLS looks like a bad idea now — I suggested selling half the position for a 112% gain, and the remaining half is up 203%! Other times, selling half looks smart. I suggested selling half of Northwest Pipe, booking a 120% gain. Eventually, as circumstances changed, I recommended selling the rest of the position. But by that time, the stock had fallen to a much lower price. Even so, both sells looked pretty decent in hindsight, as the stock remains below the lowest level at which I recommended selling, and overall, that investment booked a healthy gain of 65%.

Other great investors follow similar approaches. The late Peter Cundill, for example, was a great investor who was a fan of taking half of a position off the table after it doubled. The book to read is There’s Always Something to Do: The Peter Cundill Investment Approach by Christopher Risso-Gill. In the book, there is the story about how Cundill bought Tiffany & Co. for $11 and sold it when it hit his valuation estimate ($19 per share) a year later. The problem was that six months later, it got a bid for $50. As Risso-Gill writes:

“This outcome prompted considerable discussion among the Cundill Value Fund board members over the question of how to deal with the problem of when to sell. Peter himself could come up with no absolutely satisfactory proposal or formula. In the end, the solution turned out to be something of a compromise: The fund would automatically sell half of any given position when it had doubled, in effect thereby writing down the cost of the remainder to zero, with the fund manager then left with full discretion as to when to sell the balance.”

Cundill later expressed it this way, “When a stock doubles, sell half — then what you have is a free position. Then it becomes more of an art form. When you sell depends on individual circumstances.” I think this is a reasonable approach and seems to navigate that treacherous corridor between fear and greed, between risk and reward. I don’t think such decisions should be automatic, but you should think about selling when valuations are full.

A good case study of failing to sell part or all of a fully valued stock is in the latest quarterly letter of the Third Avenue Real Estate Fund (TAREF), managed by Michael Winer and Jason Wolf. It was a good letter, and I respect the managers for admitting and discussing their error. TAREF owned a big position in Forest City Enterprises. It was a terrific investment for the fund. Over the 10 years ending Sept. 30, 2008, Forest City delivered a return of 16.7% annualized.

However, for the three years ending Sept. 30, 2011, the stock generated an annualized loss of 29.4%! Messrs. Winer and Wolf write: “After 10 years of providing shareholders with stellar returns, most of those returns have been given back… So what happened?”

Lots of things changed with the company over that span, as you might imagine, and they discuss them. But Winer and Wolf conclude that they made a mistake not trimming the position in 2006 and 2007. “The stock traded at all-time highs, and it became more difficult to justify the stock price without stretching our valuation estimates.”

Because of this experience, they have adopted a revised approach. This includes being “more proactive in reducing and/or eliminating holdings based on price appreciation or to reallocate into securities with more-attractive valuations.”

Winer and Wolf sum up:

“These proactive portfolio adjustments do not represent a change in fund management’s fundamental approach to analyzing businesses and the prices of their securities, nor does it mean that we are now engaged in ‘market timing.’ We time our entry and exit from securities positions based upon fundamental valuations, not on expectations of price movements in the market.”

I think that is well said. And it’s essentially how I think about the problem.

In the end, what you want to do is go in as a buy-and-hold investor. You want the effects of compounding to work for you, as well as the favorable tax treatment that goes along with buy-and-hold. So I think it is important to enter every new investment with a buy-and-hold mentality. Even modest rates of return pile up to extraordinary heights over time. But you also want to be alert to when your thesis is no longer true.

Back in May 2005, I visited Ralph Wanger in Chicago. Wanger, if you don’t know, was another great investor. He led the Acorn Fund to market-beating returns over a 26-year stretch. He spent two hours with me, just talking about his philosophy of investing. I loved it and included my summary of the interview in my first book, Invest Like a Dealmaker. Wanger’s sell discipline was pretty simple: Sell when your reason for owning the stock is no longer true.

This is probably my favorite reason to sell. When the main thesis for owning the stock vanishes, it’s often a good time to go. If a great balance sheet is one of the reasons you own something, for example, and it does a deal that makes the balance sheet weak, then it’s time to go. Or if you bought a stock because of a big gap between the stock price and NAV and that gap closes, then it’s time to at least think about selling.

There are also portfolio considerations to think about. If I need to sell something cheap to buy something cheaper, then I will. Some regular trimming is good, I find, to stay invested in the best and most-convincing ideas. This makes evaluating selling hard, too, because maybe what I sold continued to do well, but maybe what I bought did a lot better.

So this is a long answer. But believe me; I’ve given the art of selling a lot of thought. I track every sell I’ve ever recommended to my subscribers, with the idea of trying to learn something from it.

The bottom line: There is no magic way to sell to ensure maximum gains every time out. I think anytime you sell, you could cost yourself money if that stock turns out to be a big winner. I understand that risk. On the other hand, as Third Avenue shows, there are also risks in getting too complacent about a holding. When the market gives you a great price to sell, you should be willing to at least think about reducing your position. As long as valuations remain reasonable, though, you may hold a stock indefinitely as the stock and the value of the business grow together over time.

Also, we don’t have to be perfect in holding onto everything we buy in aiming for Phelps’ 100-to-1 returns. The main idea is to know how those big returns happened and what investors had to do to get them.

Phelps summed it up best. “Just as a slight change in a golfer’s grip and stance may improve his game, so a little more emphasis on buying for keeps, a little more determination not to be tempted to sell… may fatten your portfolio. In Alice in Wonderland, one had to run fast in order to stand still. In the stock market, the evidence suggests, one who buys right must stand still in order to run fast.”

Regards,

Chris Mayer,
for The Daily Reckoning

The Art of Selling Stocks 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?".

Annoying analyst: We have PotashCorp at overweight. We believe with the structural deficit in potash that —

Me (interrupting): I have a sell on it and dropped coverage.

Annoying analyst: You did what? What did you do that for? Is your firm making a strategic change in direction? You can’t cover fertilizers and drop PotashCorp! (chuckling incredulously.)

Me: I can. I don’t have to cover anything. I cover what I like. When the Street hates the stock, I’ll put it back at buy.

I think the other analysts thought I had six heads. But I do remember one analyst made a point of coming around to me afterward and asking for my card.

Most of the time I just go with the flow. I am an easygoing fellow. But every now and then I like to tweak these clowns. I remember I was at a conference in which about a dozen companies presented. After one company’s presentation, I got tired of hearing all the softball questions and the overly promotional CEO fielding them. Listening to him, you’d think his company were the greatest thing since sliced bread, instead of a flimsy money loser.

So I got in the queue to ask a question. Finally, I got the chance to ask the obvious:

Me: This may seem like a simple question, but I hope to get a serious response… Why doesn’t your company make any money?

CEO: Excellent question!

But sometimes the Street is overly pessimistic. I remember being at a conference in February 2009. There were about 16 companies presenting. The mood was glum. One CEO stood up and said, “It feels like a funeral.” It did. The world was ending. In six weeks, we’d all be eating dog food and howling at the moon. So everyone seemed to think.

At lunch, at about the midway point, I was just trying to make conversation with the analyst next to me:

Me: So you have any favorites you like so far?

Analyst: How about none of them.

I’ll always remember that. Here were some great little industrial companies selling cheaply. And no one was excited. I left that conference determined to recommend Flowserve (NYSE:FLS), which has done very well since. I met the CEO after his presentation, standing alone in the hallway drinking his ice water. I was the only one who came up to him.

A year later, I went to the same conference. The stock had doubled. But the room was full and the CEO wasn’t alone standing in the hallway after giving his talk.

Sometimes I have to hurdle some skepticism from people who are not sure what I’m up to. I remember I called up one CFO of a small company. I told him who I was and what I did and that I was thinking of recommending his stock, but I had some questions first. I remember he said, “Well… How much is this going to cost me?”

Ha! Obviously, he had been approached by others before who wanted some kind of compensation for writing favorably about his stock. The idea that I was truly independent, beholden only to my subscribers, was refreshing and unusual to him.

Anyway, enough of my reminiscences. It is good to rub elbows with the Street now and then. Sometimes you do get some good nuggets…

Recently, I wrote about the big opportunity shaping up in Europe as its banks look to unload assets. I recently listened to Dan Och give a presentation at a Goldman Sachs conference in New York, which had a little more insight into that idea.

Remember, Och is a pretty darn good investor himself. His Och-Ziff Master Fund has returned nearly 10% annually since inception in 1998. And it’s done so with about a third of the volatility of the market as a whole. So Och’s opinions are not like some random CEO popping off about the market.

Let’s get to the presentation…

Asked about the investment landscape in 2012, Och had this to say about Europe:

“We are starting to see certain areas [that] we consider to be asymmetric opportunities. There’s been some substantial dislocation in credit and structured credit in the US and Europe that are very good opportunities for us… Longer term, we see some big opportunities. For example, European banks at some point are likely to start selling substantial amount of assets, and we’re well positioned for that…

“The vast majority of assets that have to be sold have not been sold. If you look at the proposal that was made in late October by the various European authorities that talked about increasing Tier 1 capital on their banks, a big part of how they intend to do that is selling assets…”

“We’ve been in London for 14 years. We have 65 people. We have a distressed credit team. We have a structured credit team. We have a real estate team. We have all of the resources and capabilities. We’ve done an enormous number of transactions there.”

After hearing this, I started to think OZM itself might also wind up being a good play on the “Biggest Fire Sale in History.”

Regards,

Chris Mayer,
for The Daily Reckoning

Doing What Wall Street Doesn’t 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?".

Europe’s banking sector holds 2½ times as many assets as the U.S. banking sector. It’s huge. And it’s in big trouble. Europe’s banking sector needs cash — mountains of cash.

As a result, it will have to sell more than $1.8 trillion of assets, which will likely take a decade to work through. For perspective, it sold only $97 billion from 2003–10. “The list of asset sales is the longest I’ve seen in 10 years,” says Richard Thompson, a partner at PricewaterhouseCoopers in London. Knowing how these things work, the final tally could well be double that. The world has never seen anything this big before.

Where will the cash come from?

This is our opportunity. There is no better, more-reliable way to make money than to buy something from someone who has to sell. Bankers are the best people in the world to buy from. Believe me, I know.

I was a vice president of corporate banking for 10 years before I started writing newsletters in 2004. I would get at least three or four requests every year from some investor group asking if we had any assets we were looking to unload. Why? Because they know banks are stupid sellers.

I once had a big real estate deal go bad on me. But I knew I was covered by good collateral twice over. You’d never know it based on the pressure I got to get rid of the thing once the borrower stopped paying and the bank took the asset. I knew, given a little time, I could sell the property and make a bundle for the bank. But the folks at the top didn’t want to hear it. They wanted that bad loan gone. They wanted to wipe it off the books fast.

So I sold it quickly, basically at fire-sale prices. It was still the most-profitable loan the bank made that year, because I got a price a good 35% above the loan amount. But the group I sold it to — which could’ve been more patient in marketing the property – flipped it again and made an easy 50% above that. The bank left a lot of money on the table and knew it — and didn’t care.

But institutionally, banks can’t really hold bad debts for long. As soon as they report a big bad debt on a quarterly financial statement, some annoying things happen. It means they have to put aside more capital for this particular loan, which they hate to do, as it lowers profitability and requires a lot of paperwork. It can raise the attention of regulators, which banks hate. It can raise shareholder suspicions about lending practices, which banks hate. So the usual way to deal with bad debts is to clear ’em out as fast as possible. (Unless you’re swamped with bad debts in a full-blown crisis, in which case you try to bleed them out and buy time to earn your way out, and/or patch them up as best you can to keep up appearances while you pray for a miracle — or a bailout.)

With the EU banking sector loaded with trillions of stuff it must sell, the mouths of knowing investors drool with money lust. These are deals the big boys do. Prem Watsa, the brain behind Fairfax Financial and dubbed by some as “the Warren Buffett of Canada,” gets to do these deals. Wilbur Ross, the billionaire investor famous for investing in distressed assets, gets to do these deals. Warren Buffett he gets to do these kinds of deals.

Normally, you need a fat wallet to get in this club. But I recently found a way to get into this “club” that a public-school teacher could afford.

One such investor is a guy named Bill McMorrow. You’ve probably never heard his name before. But his current joint venture fund has returned 42% annually since it began in 1999 by buying up distressed property from banks.

McMorrow has a lot practice buying stuff from banks. In 1995, he bought up property debt from troubled Japanese banks. In 1997, he waded into Hawaii’s busted property market, picking up a 450-acre land parcel at Kohanaiki on the “Big Island.” In the U.S. financial crisis in 2008, he bought up apartment buildings in California. This is the sort of thing that builds 42% annual returns through the storms of crisis-filled markets.

His company and partners recently bought $1.8 billion of U.K. real estate from the troubled Bank of Ireland at a 20% discount to the face value of the loans.

“This is a very high-quality loan portfolio,” McMorrow said. “All the loans are current.”

There are 170 properties that secure these loans. All of the property is in the U.K., and 60% is in London. It’s a mix of office, multifamily and retail, with a smattering of industrial property, hotels and land. I’m betting he’ll make a mint.

McMorrow is a real estate guy through and through. It’s what he knows. He’s been at it for 36 years. So his opinion and track record ought to carry water. “When you look at the opportunities around the world,” McMorrow said, “we really feel over the next three–five years that the greatest opportunities — for all the reasons that everybody reads about now everyday — exist in Europe. The markets here in the United States, although there will always be some opportunities to buy things at prices that we like, have become, I would say, way more efficient. There is more capital and there is more efficiency in the market, so prices in many cases got bid up to the point where we’re probably not buyers.”

But in Europe, the banks have to raise cash. I think the EU crisis, as boring as it is, is about to get a lot more interesting as investors get a chance to pick up cheap assets from the biggest fire sale in the history of earth.

Regards,

Chris Mayer,
for The Daily Reckoning

The Biggest Fire Sale in History 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?".

While killing some time at the JFK airport a couple weeks ago, I grabbed a copy of Bloomberg Markets magazine and perused it over breakfast. There was one story that struck me titled “Time to Head Home for Some Manufacturers.” The basic gist is that American manufacturing is more competitive than most people think.

But the manufacturers themselves are starting to notice. And so some of them are opening up new plants in the US or relocating far-flung plants back home. The math is pretty simple. The big lures that sent them abroad — cheap labor and cheap fuel — are no longer so attractive.

As I noted on Feb. 3, the wage gap has shrunk. Wages in China and other overseas markets have gone up a bunch while US wages have stagnated. Cheap fuel has long since expired as a reality. Oil is the big factor and crude oil averaged north of $100 a barrel last year for the first time ever. But natural gas is another lure to come back to the US. In China, for example, natural gas prices are twice what they are here.

There is more: The US dollar has lost a quarter of its purchasing power since 2002 against a basket of 20 major currencies. That makes US assets and talent cheaper compared with similar assets and talent overseas.

The raw costs are only part of the equation. There is the soft stuff to consider as well, things like intellectual property risks and the fragility of supply chains. The Japanese tsunami and floods in Thailand caused major disruptions for manufacturers. And the US itself is still the world’s largest market. Therefore, the thinking goes, it could be better to make things closer to the customers that buy them.

Researchers at Gartner predict that 20% of the goods made in Asia for the US will shift back to the US by 2014. Surveys of manufacturers show many are considering moving operations back to the US.

As we continue to slog our way through second-quarter earnings, we see more companies announcing investment in the US. This is true from the giants like Caterpillar to the smaller players like Carlisle. Carlisle Companies is a small conglomerate that makes tires and insulation and more. CEO Dave Roberts recently wrote: “We find it as cheap to manufacture in the US as in China.”

If you got caught saying something like that in public, even just a couple of years ago, people would’ve written you off as idiotic, blindly patriotic or fit for the madhouse. Maybe all three.

In Manhattan [last month], I attended the Gabelli’s 22nd annual Pump, Vale & Motor Symposium. There, a dozen industrials trotted out there stories. These were companies with blue collars working in places such as Batavia, N.Y., and Mansfield, Ohio. It was hard to walk away from there thinking the world was going to end. There are a lot of companies doing some pretty cool things. Their backlogs are healthy. And while nearly everyone was cautious about making any kind of robust forecast, it was clear that business was not bad.

Among the various presenters, Flowserve was one of the most red, white and blue. Its last acquisition in 2011 was for Lawrence Pumps, a company based in Massachusetts. Before that, in 2010, Flowserve picked up Valbart, an Italian manufacturer that is now opening a plant in Houston.

Of course, many people still think we don’t make anything in America anymore. I read a great piece in The Atlantic recently called “Making It in America,” by Adam Davidson. An excerpt:

“We do still make things here, even though many people don’t believe me when I tell them that. Depending on which stats you believe, the United States is either the No. 1 or No. 2 manufacturer in the world (China may have surpassed us in the past year or two). Whatever the country’s current rank, its manufacturing output continues to grow strongly; in the past decade alone, output from American factories, adjusted for inflation, has risen by a third.”

What trips people up is the shedding of manufacturing jobs. Just in the 10 years ending in 2009, the US shed more manufacturing jobs than it gained in the previous 70 years.

About one in three such jobs disappeared. Davidson continues:

“Is there a crisis in manufacturing in America? Looking just at the dollar value of manufacturing output, the answer seems to be an emphatic no. Domestic manufacturers make and sell more goods than ever before. Their success has been grounded in incredible increases in productivity, which is a positive way of saying that factories produce more with fewer workers.”

Still, there is a human dimension to all of this — those lost jobs and the people involved today whose jobs are hardly secure. I highly recommend Davidson’s piece if you want to get a better understanding of what’s going on.

As an investor, though, clearly, it pays to shed the old ideas that the US is not competitive as a manufacturer and that we don’t make anything here anymore. Neither is true. And that insight can make you some money.

Regards,

Chris Mayer
for The Daily Reckoning

Made in America…Again! 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?".

I think the message here is important — and potentially life-changing. Does it sound like I am exaggerating? Hang in there and keep reading. You tell me what you think after you’ve read what I’ve got here.

The impetus for this is an essay by Rolf Dobelli, a Swiss entrepreneur, titled “Avoid News.” Dobelli makes the case that news makes us distracted, wastes time, kills deeper thinking, fills us with anxiety and is toxic to our mental health. His analogy: “News is to the mind what sugar is to the body.”

I shared the essay with my wife Carol after I read it. It made an impact. Carol offered to cancel her electronic subscription to The New York Times if I would cancel my print subscriptions to The Wall Street Journal and The Financial Times. (We already ditched The Washington Post. I got tired of contributing to the salaries of Steven Pearlstein and Ezra Klein, who must be the worst writers on economics in America still getting paychecks.) Neither of us watches TV news.

I had to think about this offer. I love reading the newspapers every morning over breakfast and tea. I also passed on the letter to a buddy of mine who is in the business of advising institutional clients where to put their money. Dobelli had him convinced too, and the next day, he told me he left his WSJ and FT unread.

So what is Dobelli saying? Let me hit some high points.

Dobelli’s analogy with food is a good one. We know if you eat too much junk food, it makes us fat and can cause us all kinds of health problems. Dobelli makes a good case that the mind works the same way. News is brightly colored candy for the mind.

News is systematically misleading, reporting on the highly visible and ignoring the subtle and deeper stories. It is made to grab our attention, not report on the world. And thus, it gives us a false sense of how the world works, masking the truer probabilities of events.

News is mostly irrelevant. Dobelli says to think about the roughly 10,000 news stories you’ve read or heard over the past year. How many helped you make a better decision about something affecting your life? This one hit home.

Last year, I wrote 58 emails to my subscribers under the Capital & Crisis banner. I looked back and counted only five in which a news story was front and center. Even then, I used the news more to make what I was saying seem relevant and timely. But I could’ve excised the news and nothing would’ve been lost.

We get swamped with news, but it is harder to filter out what is relevant — which gets me to another point that hit home. Dobelli talks about the feeling of “missing something.” When traveling, I sometimes have this feeling. But as he says, if something really important happened, you’d hear about it from your friends, family, neighbors and/or co-workers. They also serve as your filter. They won’t tell you about the latest antics of Charlie Sheen because they know you won’t care.

Further, news is not important, but the threads that link stories and give understanding are. Dobelli makes the case that “reading news to understand the world is worse than not reading anything.” In markets, I find this is true. The mainstream press has little understanding of how markets work. They constantly report on trivia and make links where none exist for the sake of a story, or just for the sake of having something that “makes sense.”

In markets, reporters try to explain the market every day. “The market falls on Greek news” is an example. Better to not read anything if you’re going to take this kind of play-by-play seriously at all.

The fact is we don’t know why lots of things happen. We can’t know for sure why, exactly, things unfolded just as they did when they did. As Dobelli writes, “We don’t know why the stock market moves as it moves. Too many factors go into such shifts. Any journalist who writes, ‘The market moved because of X’… is an idiot.”

You contaminate your thinking if you accept the neat packages news provides for why things happen. And Dobelli has all kinds of good stuff about how consuming news makes you a shallow thinker and actually alters the structure of your brain — for the worse.

News is also costly. As Dobelli points out, even checking the news for 15 minutes three times a day adds up to more than five hours a week. For what? He uses the example of the Mumbai terror attacks in 2008. If a billion people spent one hour of their attention on the tragedy by either reading about it in the news or watching it, you’re talking about 1 billion hours. That’s more than 100,000 years. Using the global life expectancy of 66 years means the news consumed nearly 2,000 lives!

Pretty wild, right?

So what to do? Dobelli recommends swearing off newspapers, TV news and websites that provide news. Delete the news apps from your iPhone. No news feeds to your inbox. Instead, read long-form journalism and books. Dobelli likes magazines like Science and The New Yorker, for instance.

As an investor, I’d add some of mine own:

• Ignore any news chatter that attempts to explain or predict what is happening in the stock market

• Stop checking your stock portfolio multiple times a day

• Don’t try to find reasons for every dip and rise in the prices of your stocks. Instead, accept that the vast majority of the time, nothing important happens

• Ignore the drumbeat of economic news. If you must read news, try a perusal of the weekly Economist

• Ignore, especially, the drumbeat of economic data — the unemployment report, GDP, the trade balance and all the rest. As Peter Lynch once wrote, “If all the economists of the world were laid end to end, it wouldn’t be a bad thing.”

Instead:

• Read the shareholder letters of successful investors. I like reading Steve Romick at FPA, for instance. I also enjoy the shareholder letters of the Third Avenue family of funds. There are many others. Read any research such investment houses share

• Spend little or no time trying to guess where you think the market and economy will go. Instead, focus on finding good deals and winning teams of entrepreneurs and investors that you can invest alongside

• Listen in on the conference calls of your favorite companies and investors

• Check the stories and prices on your stocks once a quarter

• Read books written by successful investors. Then read them again. Some of my favorite authors include Martin Whitman, Seth Klarman, Peter Lynch, Ralph Wanger, Benjamin Graham and Joel Greenblatt. I’m sure I’m leaving a bunch out, but you can put together a truly awesome library of successful investors for little money

• Read books that deepen your understanding of markets and how they work. Read Louis Lowenstein and James Grant, for two of my favorites.

My fundamental problem with the news is that it makes it seem as if important things happen every day. The vast majority of the time, nothing of any significance happens whatsoever — which is good for you. If you avoid a lot of the news, you will have a lot more time to dedicate to other things. Feed your brain good food and you’ll get better results. It seems that simple.

Dobelli himself has sworn off the news. And he reports he feels much better for it: “less disruption, more time, less anxiety, deeper thinking and more insights.” I can’t do the whole idea justice here. If you want to read Dobelli, check out the full essay here.

Print it out. Turn off the smartphone. Stop checking email for 25 minutes. And just read it. Be forewarned: It might just change your life.

Regards,

Chris Mayer
for The Daily Reckoning

Lose the News 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?".

US manufacturing is staging a comeback.

Caterpillar, the world’s largest maker of earth-moving equipment, gave us some tangible confirmation in the latest earnings roundup. Based on the business it sees, Cat expects US construction spending will increase in 2012 for the first time since 2004. And Eaton, another large industrial, followed that up by saying it expects its markets to grow faster in the US in 2012 than anywhere else. If it plays out that way, it would be the first time since the mid-2000s that the US led the way.

These are the first robins of spring. Forget the official data. This is real economics. As hard as it may be to believe, US manufacturing is coming back. There are other clues.

A new report by Cushman & Wakefield, a commercial real estate services firm, points out that new leases for industrial property “returned to levels not seen since prior to the 2008-09 recession.” Tenants signed new leases for 306 million square feet, up 14% from a year ago and the most space signed since 2007.

What drives leases for industrial space? Let Jim Dieter, an EVP at Cushman & Wakefield answer: “Manufacturing is the main driver within the industrial landscape.” Busy factories mean more rail and truck flow. It means fuller warehouses. It means looking for more space.

How to explain this? Isn’t China eating America’s lunch?

I found a recent paper by Reynders, McVeigh Capital Management that points to a few reasons for the sudden revival that jibe with what I’ve heard from the companies themselves. The report is called “Workforce Rising: Why US Manufacturing Is Poised for a Comeback.”

One is that the wage gap is shrinking. It isn’t that much cheaper to move to, say, China anymore. The nearby chart nicely sums up what’s happening. As wages have gone gonzo in China, its wage edge melts away. US manufacturing wages were 22 times that of China’s in 2005. Today, that wage gap is under 10 times and likely will be under five by 2015. (See the chart below.)

Transportation costs figure into this too and cut further into China’s advantage. As the price of oil has stayed north of $100 a barrel, the cost to ship anything is high. As author Jeff Rubin says, “With every dollar increase in the price of the bunker fuel that powers the containerships that ply the Pacific, China’s wage advantage becomes less and less important.”

So those are two reasons for the manufacturing revival in the US. There are two more compelling reasons that have to do with what’s in the ground. Let’s start with one of my favorites: water.

In a world where fresh water is scarce, such as in China and India, the US remains water-rich by comparison. Around the world, “Many regions are already approaching ‘peak water,’ a condition under which usage rates surpass the natural rate of replenishment,” the authors write. “Importantly for the manufacturing sector, the US is home to the largest reserves of water on the planet.”

People in the US tend to ignore this lucky circumstance. Manufacturers don’t. They use lots of water to make everything from jet engines to minivans.

In addition to water, the US has plenty of cheap natural gas. As we’ve talked about before, this is bringing back firms that use natural gas to make things. The McVeigh report notes how Nucor began building a $750-million plant in Louisiana. It plans to superheat natural gas and mix it with scrap iron and iron ore pellets to make steel. If you burn natural gas, you want to be in the US.

Even the automakers are coming back. GM will invest $2.5 billion in US factories. Until recently, that money was going to Mexico. Ford signed a new contract that calls for $16 billion in US investments and 12,000 new jobs by 2015. The foreign automakers are coming too. Mercedes plans to spend $2.4 billion by 2014 to expand an Alabama plant that will add 1,400 jobs. You get the idea.

I like this whole story because it will surprise a lot of people and, hence, has some value as a contrarian observation. In September 2010 (letter No. 79), I wrote a letter with the headline “The USA — Still a Nation of Builders.” The main point, as I wrote then, was “to leave you with a different perception of American manufacturers. They are not like dinosaurs on their way to extinction. In fact, some of them are great investments.” I showed a number of ways in which US manufacturers were doing quite well.

The thesis landed with a thud. It was mostly ignored. If anything, I heard people tell me how it couldn’t be so. Nevertheless, I urged my subscribers at Capital & Crisis to buy Globe (NASDAQ:GSM), a low-cost US manufacturer, which went on to double.

A lot of investors will miss the opportunity to cash in on this rebound in American manufacturing, simply because the idea is so counter to what they think they know. When it’s obvious to everyone what’s going on, of course, it will no longer be a worthwhile investment theme. But for now, US manufacturers get little respect and offer a good pool of potential investment ideas.

Regards,

Chris Mayer
for The Daily Reckoning

The Great Comeback No One Will Believe 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?".