The Rude Awakening
Wall Street, New York
Tuesday, May 3, 2005 ------------------------- The Rude Awakening PRESENTS: Where will you find gorgeous
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By Eric J. Fry As a California native, your "New York" editor appreciates
Southern California's unique appeal. But he also
appreciates southern Brazil's unique appeal. He wonders,
therefore, whether the price of Brazilian beachfront
property might be too low relative to Californian
beachfront property. More broadly, he wonders whether selective emerging market
real estate, as an asset class, is too cheap relative to
real estate here in the "developed world." In an age of ubiquitous Internet access and limitless
cross-border investment flows, the sizeable price
differentials between "comparable" Californian and
Brazilian properties seem a bit anachronistic. Perhaps, the
California-Brazil price premium will begin to narrow. It's
just a thought, but we are drawn to it like an alcoholic to
a midday martini. 6,100 miles to the southeast of Orange County, California,
you will find no drive-through Starbucks, but you will find
superb double espressos - served in a porcelain demitasse,
rather than a paper cup - that cost only about 40 cents.
And you will also find gorgeous tropical beaches bathed in
crystal-blue water, as well as succulent mangos and
papayas, delicious seafood…and a smattering of beautiful
women…if you're into that sort of thing. As an added bonus, the beachfront properties in this
tropical paradise do not usually carry multi-million-
dollar, Orange-County-style price tags. But there are couple of drawbacks; the place is a 9-hour
plane ride from New York City and the locals speak
Portuguese, rather than English. Even so, we'd rather
invest in Brazilian beachfront property than Orange County
beachfront property. Your editor loves the "O.C." - he spent much of his youth
frolicking on the county's beaches. But he remembers when
the $4 million homes of Laguna Beach were only $40,000
homes. And much more recently, he remembers when the $4
million homes were only $400,000. We would not quarrel with the notion that the $4 million
homes of Laguna Beach are worth every penny, but we do
wonder how many more pennies they will be worth over the
next ten years. Even in a nation of very expensive real
estate, Orange County real estate seems conspicuously
pricey. Newport Beach, for example, ranks #4 on the Forbes
Magazine list of America's 25 most expensive zip codes. Two
other Orange County zip codes also made the cut. "The list
is testament to the costs of living in California," Forbes
relates, "with half of our top ten ZIPs in that state, and
nearly two-thirds of our top 25." Maybe, just maybe, California's cache is not worth quite as
much cash as folks are paying - at least not when
considered in the context of competing global real estate
investments. A recent issue of "Homes & Land - South & Coastal Orange
County," touts a "beautiful, 4-bedroom, 3.5 bath,
oceanfront home" in Laguna Beach for $7.25 million. A few
miles to the south, a tiny 50-year old oceanfront home in
South Laguna recently changed hands for more then $4
million. Meanwhile, a Brazilian real estate agent offers a 4-bedroom
"Lindíssima casa" (gorgeous house) situated directly on the
beach of Camburi - one the many beautiful beaches of the
"littoral of São Paulo" - for $380,000. Is the $4 million Laguna Beach property really worth more
than 10 times the Camburi property? The answer is both yes
and no. Yes, in the sense that the market has "spoken" and
it has said that Orange County's beachfront properties are
worth exactly what the last buyer paid. No in the sense
that the market might change its mind at any moment…or at
least revise its opinion somewhat. Therefore, since prices sometimes change, which real estate
offer the superior investment opportunity? That which lies
along the coastline of Orange County or that which lies
along the littoral of São Paulo? The answer to the question must include both qualitative
and quantitative considerations. Profit potential is not
the end-all, be-all…but it doesn't hurt. For example,
some buyers of foreign property might desire an occasional
Big Mac, or an occasional visit to an American physician or
an occasional conversation in their native tongue. Such
perks are much more readily available in Orange County than
in Brazil. Furthermore, the Brazilian coastline, for all of its
splendor, lies well beyond of the U.S. border - far from
the terrific American public school system, far from the
protection of the U.S. military and far from all of the
other American regulatory authorities that work so
tirelessly to ensure our life, liberty and pursuit of
happiness. Clearly, one does not forego - without careful
consideration - the many protections conferred by the FBI,
CIA, EPA, DEA, FDA, USDA and Alan Greenspan's Federal
Reserve. But despite these shortcomings, we suspect the $300,000
beachfront homes of Brazil will become $1 million homes
well before Newport's $3 million homes become $10 million
homes. Brazil, of course does not offer the only beachfront
competition to the U.S. property markets. Your editor's
employer also operates a gorgeous beachfront development in
Nicaragua, complete with English-speaking property managers
and Internet access, along with many other desirable
amenities and creature comforts. Our sister publication, International Living, [Ed. Note:
Live like royalty on $17 a day… http://www.agora-
inc.com/reports/IL/WILVF330] spills a lot of ink every
month, highlighting attractively priced real estate in
various foreign locales. If emerging market properties represent a true value,
rather than a theoretical value, and if they are the verge
of a lengthy bull market, a world of opportunity -
literally - unfolds before us. The anxious American
homeowner need not, for example, sell his home and rent an
apartment while waiting real estate Armageddon. He may,
instead, sell his home HERE and buy a property THERE. The precise location of "there" could be almost anything
that offers great value for the money, along with the
specific characteristics and amenities deemed "essential"
by each individual investor. However, every prospective investor should remember that
emerging market real estate, just like emerging market
stocks, can subject investors to serious risks. If all goes well, buyers secure clear title to their
property without a problem. The property then appreciates,
in local currency terms, while the local currency itself,
also appreciates against the U.S. dollar. In which event,
purchasing foreign real estate would prove to have been a
brilliant idea. On the other hand, a buyer of foreign real estate might
endure various miseries trying to secure clear title to his
property, while also having to pay sizeable official and/or
"unofficial" taxes to various governing authorities, only
to take possession of a property that falls in value, while
the local currency also falls in value against the U.S.
dollar. In which case, having purchased foreign real
estate would prove to have been an idiotic idea…unless
you really like the place. In short, the Brazilian coastline might not be beckoning
EVERY North American investor…but it may be beckoning
some of us. [Ed. Note: If you want to make money from real estate,
there is a much better way. You buy real estate securities
trading on public exchanges well below their private market
values. Our latest find has $83-a-share in land, but the
whole company only trades for $47! It's a win-win
proposition that hardly anyone knows about. Check this out: Real Estate Shareholder
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------------------------- Did You Notice…?
By Dan Denning The gold price resumed its slide yesterday…Should we be
worried? The bad news is that Newmont mining, the large-cap gold
mining stock, tumbled below $40 last week on enormous
volume and the commercial traders are as short the gold as
they've been at any time in the last year. The
'commercials,' of course, are thought to be the smart
money. So if they are betting against gold, should we be
doing the same thing? 
Probably not, I'd have to say. We're still in a secular
bull market for commodities…Remember, the low commodity
prices of the 1980s and 1990s led to a long period of
under-investment in productive capacity. There will be no
quick fix for this problem. Meanwhile, demand continues to
boom as up-and-coming economies compete for scarce
resources. Against this backdrop - aided and abetted by a weak dollar
- the gold price should continue to gain ground. Ask
yourself if anything has really changed to make gold's
archenemy, the U.S. dollar, fundamentally stronger? The
answer is no. I showed a trader friend of mine two charts. One showed the
explosion in volume on Newmont and the subsequent move down
below $40. The other chart (above) shows that commercial
gold hedgers are as short as they've been at any time in
the last year. My friend replied, "Yeah, that looks a little ominous
doesn't it? I guess this must mean that North Korea's next
missile will actually HIT Japan, thereby triggering a
flight out of yen (and gold) into dollars, the ultimate
safe-haven currency." Have stranger things happened? I doubt it. Big picture: if you own the stocks of energy or commodity
producing companies, you still have equity risk. But it's a
good time to add more to your existing positions, or if
you're a speculator, buy calls. [Ed. Note: Dan Denning is a world-respected macro analyst
and options trader. You can learn more about his trading
style from this web posting… Strategic Options
http://www.agora-inc.com/reports/STA/WSTAF447 ------------------------- And the Markets…
| Monday | Friday | This week | Year-to-Date | DOW | 10,252 | 10,193 | 59 | -4.9% | S&P | 1,162 | 1,157 | 5 | -4.1% | NASDAQ | 1,929 | 1,922 | 7 | -11.3% | 10-year Treasury | 4.19% | 4.20% | -0.01 | -0.02 | 30-year Treasury | 4.51% | 4.52% | 0.00 | -0.31 | Russell 2000 | 586 | 579 | 7 | -10.1% | Gold | $429.87 | $434.40 | -$4.53 | -1.8% | Silver | $6.84 | $6.91 | -$0.07 | 0.4% | CRB | 302.89 | 303.74 | -0.85 | 6.7% | WTI NYMEX CRUDE | $50.92 | $49.72 | $1.20 | 17.2% | Yen (YEN/USD) | JPY 105.04 | JPY 104.85 | -0.19 | -2.4% | Dollar (USD/EUR) | $1.2863 | $1.2871 | 8 | 5.1% | Dollar (USD/GBP) | $1.8943 | $1.9079 | 136 | 1.2% |
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