»» Most equity markets pulled back meaningfully with the exception of Asian indices. The sell-off accelerated following Friday’s lackluster U.S. employment data.

»» Investors should keep an eye on Germany. It has succumbed to Eurozone headwinds. (page 2)

»» The U.S. jobs report shouldn’t be a big surprise—it resembles many others in this recovery cycle. The problem is America is climbing out of a much deeper canyon than before. (page 3)

»» Global Roundup: Updates from the U.S., Canada, Europe, and Asia. (pages 3-4)

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Gaithersburg, Maryland – “About eight years ago, I was going down the elevator of a hotel in Las Vegas with a friend of mine,” Arnaud Karsenti told me. “The elevator skipped the 13th floor. And my friend said to me, ‘How come there is no 13th floor? What a bunch of wasted space!’”

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:

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Student Loan Battle

There was a big fight in D.C. this past week over student loans.

The issue is a scheduled increase in interest on new student loans from 3.4% to 6.4% set for July 1. Clearly this is a dumb plan. I don’t see any political opposition to the idea that the summer of 2012 is a horrible time to double the cost of student loans. It will shock no one that the ‘solutions’ being put forward by the politicos are the same ones they propose for every other problem.

The House Republicans have put forward a Bill to extend the 3.4% rate for a year. The cost (increased deficit) of the twelve month extension is $6B. The Republicans want to offset the $6B with (surprise) $12B in reduced spending for the Affordable Care-Act. The Republicans love to trade marbles for reduced Obamacare. They want a 2-1 reduction in medical spending versus education costs. Maybe the “Reds” have the chips to push this outcome. They might settle for a 1-1 deal, but the White House will hate this outcome.

The Senate Democrats want to raise taxes on those making over $250K to offset the cost of the one-year deferral. Their argument is similar to the Buffett tax plan they tried a few weeks ago. Lacking support, it was so clear it wouldn’t pass that it was never voted on. I would give the Senate legislation on student loans a zero chance in the House. It is D.O.A.

There will be the same ideological pissing match and the same result. We will get a one-year extension “paid” for with “promised” reductions in expenses starting in 2017. Another kick of the can, and another big problem in 2013.

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Dear Reader,

Vedran Vuk here, filling in for David Galland. Today, I’ll discuss the scenario of a European recovery. Would one mean that we’re finally out of the woods? I have a couple of other interesting pieces along with the Friday Funnies, so let’s get started.


What If Europe Does Recover?

By Vedran Vuk, Senior Analyst

Let’s play along with the economic scenario many market participants are predicting: a calmer Europe. If the continent does recover, is it time to put on the party hats and celebrate? Well, not quite. Sure, the pressure on equities would ease up, causing a brief rise in the market. But what then? Are we really out of the woods?

If Europe escapes this mess without a major crisis, those countries won’t come back at a screaming pace. Instead, the path to economic recovery will still be a slow crawl. Furthermore, China continues to have problems of its own. What started as talk of a Chinese slowdown is turning into real numbers. Sure, China isn’t doing horribly, but it’s hardly the hot market of a few years ago. The promise of never-ending growth with minimal risk just isn’t materializing. There are also other major players with mixed performances. With commodity prices cooling a bit, Brazil’s GDP growth is projected at 3.2% in 2012, a slight improvement from last year’s 2.7% growth. However, only a few years ago, predicting double-digit growth rates would have drawn no laughter, based on Brazil’s impressive 7.5% growth rate in 2010.

And then there’s the US story. The job market is improving at a snail’s pace… much like the rest of the world. If the euro crisis ends, it won’t mean a burst of growth for the US – but it could mean some additional headwinds. US Treasuries will no longer be shielded by buyers protecting themselves from the worst-case scenario. As soon as the coast is clear, Treasury investors will leave in droves, either flooding back into equity markets or higher-yielding euro countries.

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