Feeding with the Vultures

 | Oct 21, 2011 | 1:15 PM EDT
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When it comes to the economy I still see a condition best described as a little better, but a long way from good.

Real estate markets are still weak and unemployment is still high, especially U6 unemployment levels. We are seeing some minor signs of improvement, but we are also seeing some signs of inflation building. We are a long, long way from what could be called a healthy economy. The markets are focused on developments out of Europe right now and again, there is a lot of talk but no clear easy, much less quick solutions to the sovereign debt and banking problems on the continent.

The other focus for traders is, of course, earnings season and the results there change day to day it seems. Again, the picture I am taking away from earnings so far is better but not great.

Lest you get the idea that I sitting around being pessimistic about the world, know that I am merely trying to form a picture of where to invest for the eventual recovery. Eventually business interests and the individual desire to better their circumstances will overcome global governmental incompetence. Eventually innovation and productivity will lead us into a recovery no matter how many idiotic plans the bankers and politicians try to implement. When that happens many of the companies that are distressed and depressed right now will see business and stock prices soar.

I find it is helpful to take a look at those who have prospered from previous bouts of economic and market turmoil. There are several of the more grizzled vulture investors who have seen all of this to some degree before and walked away from the depths of despair with sizable fortunes. Sam Zell did the grave dance of the real estate markets. The misfortunes of others in property markets have made Zell a billionaire. Recently, Zell has spoken of investing in emerging markets and is currently investing heavily in properties in Colombia, which he called  the next star of Latin America.

Although he has said he is cutting back his US real estate activities, Equity Residential, the company he leads, has been pretty active in the New York real estate markets. 

Earlier this year, Zell also made positive comments about the potential for cities in the center of the country, such as Chicago and Atlanta. He thinks that as businesses leave the more troubled and tax heavy coastal regions of the US cities in the middle could benefit. Over the summer, Zell backed up that belief by buying 200 South Wacker Drive in Chicago. The distressed property has a 33% vacancy rate but conditions in the West Loop area of the city have been improving as predicted with vacancy rates improving and average rents beginning to rebound.

Taking advantage of Zell's insights is not as easy as one might hope. His strong belief in Colombia can be duplicated by buying ADRs of Bancolumbia (CIB). At more than 2x book value and 14x earnings, the bank is not particularly cheap but it should grow along with the nation as conditions continue to improve. Another way to possibly play growth in Colombia and South America is Cemex (CX), a stock I mentioned earlier this week as having high long-term return potential. Cemex sells cement throughout Latin America and would benefit from increased building in the region.

The move to the interior of the country can be played by investing in REITs that are acquiring properties in these areas at the current favorable prices. An old favorite, CommonWealth Real Estate (CWH), has been selling its suburban properties and focus on city center buildings. They have been very active in the Chicago markets so far this year acquiring one property and entering agreements to buy two more in the Windy City.

Following the vultures is an idea that strikes me a valid way to search for opportunities for long term success in the current markets. In addition to watching the Ravens whip up the jaguars and the Rangers get back on track at home in Texas, I plan to spend some more time of this idea over the weekend.

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