Agora Financial’s Rude Awakening

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Baltimore, Maryland

• How to avoid the nearing US meltdown with a handful of foreign real
  estate,
• Picking stocks from Chris Mayer’s “smart portfolio,”
• Avoiding the unenviable fate of the pigs in quicksand and more…

Eric Fry, back in Laguna Beach, California, reports…

If you happen to have overlooked the December 14, 2007 edition of the Rude
Awakening, you might have done yourself a small favor. That was the day we
presented a very compelling investment case for Cohen & Steers (NYSE: CNS), a
company that manages various types of real estate assets.

Unfortunately, Mr. Market does not (always) read the Rude Awakening. Shortly
after our story appeared, the price of CNS dropped about 30%. The stock has
bounced back sharply over the last couple days, but still sits about $2 below
where it was trading on December 14th. [Editor's Note: When we prepared this
column for publication on Tuesday, CNS was selling below $23 a share. Happily
for every investor who owns CNS, but inconveniently for those of us who were
planning to write about it, the stock has jumped five points since then].

So if we liked it at $30, we ought to love it at $28, right? Well, your
California editor has no idea if he should love CNS or hate it. But he is
certain that the stock is $2 less risky than it used to be. He is also
certain that Chris Mayer is a mighty fine stock picker, and Chris Mayer is
picking this stock…

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Land Grab
By Chris Mayer

I don’t like to pound the table on any one stock idea. I’d rather pound the
table on a portfolio of stocks. Having said that, I believe my long-term
thesis is still intact for Cohen & Steers (NYSE: CNS), even though its share
price has been sinking like a pig in quicksand.

Cohen & Steers is an investment manager that focuses on real estate
investments. The company has a mix of mutual funds and separate accounts that
it manages for clients. And it has been growing its assets by nearly 40% per
year on average.

As I explained in a previous edition of the Rude Awakening, “Cohen & Steers
receives fee income, including a cut on the market value of the assets it
manages…The vast bulk of what it manages is real estate related….Of that, the
fastest-growing segment is in non-U.S. real estate assets. Overseas real
estate was only 30% of the total as recently as 2005. By year-end 2006, it
was up to 41%. By the third quarter of 2007, non-U.S. real estate made up 54%
of the total.”

The company’s growing allocation to foreign real estate should insulate it
from the travails of the American real estate market. Likewise, the CNS share
price should begin to diverge from the price trend of U.S.-based REITS. And
it has. Before June 2006, the MSCI U.S. REIT Index and the Cohen & Steers
share price moved together like synchronized swimmers. However, since that
time, they have diverged from one another, as CNS has outperformed the U.S.
REIT Index. And CNS seems likely to continue outperforming for a good, long
while.

If you’ve been reading the financial papers lately, you may have heard a lot
of chatter about “decoupling.” There is this idea that the rest of the
world’s economies no longer follow in lock step with what’s happening in the
U.S. Therefore, even if the U.S. economy goes in the tank, the rest of the
world will weather the storm – so this thinking goes. I don’t know if I
believe the decoupling theory. But so far at least, the troubles in the U.S.
real estate market have not dampened the buoyancy of Asian markets.

When we look at the universe of publicly traded real estate stocks, we see
that not so long ago, the U.S. was the only game in town. But today, the non-
U.S. markets are more than twice as large as the U.S.

A growing market for publicly traded real estate is a good thing for Cohen &
Steers. It gives the company a much larger pond to fish in. As long as Cohen
& Steers maintains its share of the global real estate market, it ought to
enjoy the higher fees such assets bring. In addition, the booming real estate
markets of emerging economies ought to provide very rapid growth.
The emerging economies include China, India, Russia, Brazil, Argentina and
many more. The Economist tracks 32 emerging economies. This group accounts
for four-fifths of the growth in oil demand over the last five years.

The latest hot property item is farmland in Russia. A company called Black
Earth plans to bring more Russian land back in production. Its chairman
recently told The Wall Street Journal: “There are up to 121 million acres of
fertile land in Russia’s Black Earth region, and it isn’t producing to its
capacity.” Russian land is still super cheap, some $500 per acre. This
compares with $8,000 in Argentina, which itself is far cheaper than the rest
of Western world, where prices can be four times that. Expect to see more
land deals, especially as grain prices rise. Farmland looks like a pretty
good asset to own these days.

There is also still a frenetic pipeline of new deals in these countries. In
China, some 17 million people each year look for homes in urban areas. This
has set off a massive housing boom. In Japan, there are more than a dozen
high-rise office buildings on the docket in Tokyo alone. In Vietnam’s Ho Chi
Minh City, a new 750-unit apartment sold out in hours. Hopeful buyers lined
up by the hundreds for a chance at one of the units.

It’s a story told throughout Asia. It will take some years to correct that
kind of imbalance. Eventually, there will be too many hotels, too many office
buildings, too many homes. But such a time looks years away yet.

[Joel's Note: There is a fine reason that Chris Mayer has featured in three
of the five Rude columns this week, a week where markets have been all over
the place. Chris doesn’t go for emotional, irrational investments. He’s more
the type that will invest in fundamentally sound companies that present solid
value.

“We look awfully smart today,” Chris wrote to his Mayer’s Special Situations
subscribers on Tuesday. “We could’ve leaned our shoulder into the effort with
a bit more vigor even. But then we’d be wild-eyed tape-watching speculators.
If I sold out every time I got nervous about the market, I’d find it
impossible to be a long-term investor.”

Chris’ Mayer’s Special Situations portfolio is indeed looking pretty smart
this week. Take a look at his latest research report here, read through for a
couple of minutes and see for yourself.

Mayer’s Special Situations Investment Service

We’ll be back next week with more from the Rude regulars. Until then…

Cheers,

Joel Bowman
Rude Awakening