2011Jun27 Adapt or Die

Perhaps nothing is more important in portfolio management than adaptation. Things change and your portfolio needs to reflect it. Companies that were once titans can shrivel over time as conditions change. Bloomberg Businessweek has an excellent article on a former titan, now fallen from grace: At its December 2008 peak, Myspace attracted 75.9 million monthly unique visitors in the U.S., according to ComScore (SCOR). By May of this year that number had dropped to 34.8 million. Over the past two years, Myspace has lost, on average, more than a million U.S. users a month. Because Myspace makes nearly all its money from advertising, the exodus has a direct correlation to its revenue. In 2009 the site brought in $470 million in advertising dollars, according to EMarketer. In 2011, it's projected to generate $184 million.

In February, News Corp. (NWS), which bought Myspace and its parent company, Intermix, in 2005 for $580 million, started officially looking for a potential buyer at an asking price of $100 million, according to a person familiar with the sale process. Yet even in the midst of a frenzy for social media that has seen LinkedIn (LNKD) valued at $6.4 billion and Groupon rebuff a $6 billion takeover offer from Google (GOOG), barely anyone wants to buy Myspace.

Is the valuation of Myspace accurate or fair? Who knows and who cares? That's the nature of supply and demand---an asset is only worth what it can be sold for. In the case of Myspace, the decline has been rapid. In less dynamic industries perhaps the decline would take longer, but it might ultimately be no less damaging to your capital. Rupert Murdoch might be able to afford to lose $480 million, but I'm sure even he's not too happy about it.

Don't think it can't happen to you, Mr. Blue Chip Buy-and-Hold Investor. There are plenty of historical examples like Eastman Kodak (once over $90 in the 1990s, now available in the bargain bin for less than a latte at $3), but every decade contains a few falls from grace. Even the massive General Electric may be turn out to be, in hindsight, a victim of history.

ECONOMY:

Debt, deficit, and demographics-the 3-D hurricane- is heading to the shores of all developed economies. It threatens to derail the lukewarm economic recovery and to alter forever the heretofore path of robust growth for the developed world. In a sense, debt, deficit, and demographics will reset the world to a "New Normal"-an extended period of lower economic and return expectations for the aging and debt-ridden developed world 1. In contrast, emerging economies with healthy government and household balance sheets, responsible fiscal policies, and young labor forces will be the drivers for global growth and will compete with their developed counterparts for economic and political leadership. More importantly, the emerging economies will demand their fair share in the consumption of resources and goods. That competition for resources and goods will lead to higher prices at a time when developed countries are less able to further finance their consumption.

In a true Keynesian sense, government recessionary expenditure aims purely to smooth temporary shocks; it cannot substitute for private sector investments which are necessary to drive long-term growth. In so far that the government stimulus is financed by more debt, it necessarily translates into higher future tax burdens, which then drains future private sector consumption and investments. By backward induction, a higher future tax burden decreases expected (after-tax) return on investments, which then reduces private sector investments today. Crowding out future and current private sector activities by the public sector growth today bodes ominously for future growth.

Indeed, under standard economic theory, the government either borrows to invest for future growth, and therefore drive future tax revenue, or it borrows to shift future consumption to the present in an attempt to ameliorate shocks to the economy. In reality, deficits have a tendency to become ever-increasing debt. We have been all too willing to believe the story that future growth driven by indomitable American ingenuity will deliver us from our debt. Unfortunately, unless another decade long period of explosive technology innovation is in the cards for us, we may have just now hit a wall: The debt to-GDP ratios for many developed countries have become untenable; additional borrowing capacity is small.

REAL ESTATE (not what you think):

Surging real estate prices in Brazil and the currency's 45 percent gain against the U.S. dollar since 2008 are sending Brazilians to South Florida in search of bargain vacation homes and property investments. That's helping bolster Miami's condo market, with total sales increasing 79 percent in the first five months of 2011 from a year earlier, according to data from the Florida Association of Realtors released today.

In the Miami area, Brazilians bought 9 percent of homes and apartments sold to international buyers in the 12 months through March 2010, behind only Canadians and Venezuelans, according to the Miami Association of Realtors. Since then, "anecdotal evidence certainly points to a significant increase," said Lynda Fernandez, a spokeswoman for the group. In May, international clients bought about 60 percent of existing houses and condos and 90 percent of newly built homes, the association reported today.

The number of condos and townhouses available for sale fell to 27,700 as of June 13 from 60,900 in November 2008, after the collapse of credit markets, according to Condo Vultures.

Developers are preparing to build again with their eyes on Latin American buyers. Studnicky's company announced a joint venture, Related ISG LLC, on June 9 to market new condo developments with Miami-based Related Group of Florida, the state's largest condo builder.

Related, which was founded by Jorge M. Perez and wrote off $1 billion in losses in 2008, plans to use pre-construction deposits from Latin American buyers, who are accustomed to 50 percent down payments, to finance six projects with 1,500 units, Studnicky said. Building is expected to cost $600 million to $800 million and begin by 2013, he said.