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The catalyst i'm anticipating related to the fact that most commodities are priced in dollars. The Brazilian economy is largely dependent on exports, so a weaker dollar should help the trade deficit.
FL
CNBC is reporting that Joaquim Levy (Brazil's Finance Minister) is submitting a letter of resignation. He was seen as providing providing legitimacy to the Rousseff efforts to deal with the country's financial problems. Unfortunately he was increasingly at odds with Rousseff and members of the Workers party. It will be very unfortunate if he leaves. He is Univ. of Chicago Educated and was following Volker's script to dealing with stagflation. There is talk of not accepting the resignation. If this happens things seem to be coming to a head for Rouseff.
FL
Lazzard Oct Emerging Market Outlook an interesting read.
http://www.lazardnet.com/docs/sp0/145/LazardOutlook_EmergingMarkets_2014Q1.pdf
Summarizes my thoughts of buying stable companies at a discount to book and then waiting for a catalyst. They also emphasize the need to make sure that the corporate debt is not denominated in dollars. Something I talked about with regards to SBS. I think the catalyst will come in the form of a weakening of the dollar. As Figure 2 shows, the dollar has strengthened since 2014 against most every currency. This strengthening corresponds to the end of QE in the US. Because commodities are priced in dollars, it has been especially rough for economies based on export of commodities.
The dollar strengthening is a headwind for US companies and it is showing up in the 3rd QTR earnings announcements. This leaves the market with the anticipation that the FED is more likely to stand pat or possibly take additional action to weaken the dollar (i.e., more QE). Quite the dilemma for the FED.
The thing I wonder about is that past rate cycle hikes have signaled economic strengthening. What happens if the Fed now tightens thus increasing borrowing costs while carrying so much debt? This would add tremendously to the cost of servicing the US debt which should weaken the dollar (think budget showdowns, and credit downgrades we witnessed in 2011). This probably results in the FED standing pat until the world or debt holders push their hand.
These concerns drive some of my desire to diversify to cheap emerging markets. A credit downgrade can come overnight leaving little time to react. The whole US QE cycle seems like it was dependent on passing the baton to either corporate growth or reforms out of Congress. Neither appears to have occurred. Corporations used the cheap debt markets to float bonds to fund buy backs rather than investing in machines, employees etc, in a manner to fuel future growth (this is a generalization that seems to fit industrials but not necessarily all sectors -biotech, pharma, etc). Either way, it seems like at some point the clock runs out on a temporary reprieve provided by QE.
Interested in thoughts on these Macro Global issues.
FL
Regards FL
Dilma is so tarnished by multiple corruption scandals, it is hard to see how she can continue. How low did Nixon's approval ratings get during Watergate? Seems like Dilma has set a new low. The single digit approval she is getting is probably the recipients of the sweetened pensions she doled out. Even her Vice President is distancing himself from her.
I think most Brazilian stocks will rally hard as soon as the visibility improves (even after the 255 run up the past 3 weeks). While there are negatives, Brazil has a lot of positives that many countries would be envious of. For Example:
Their debt to GDP is 56%, half that of the US. They are a demographically young country, with a high ratio of young workers to those over 60. The currency is beat up making their goods cheap on global markets. Imports are expensive due to the currency, thus this situation generally acts to result in trade surpluses over time (assuming commodity demand picks up to normal levels).
Brazil's Central Bank interest rates are over 14%. At some point the stagflation will subside enabling the opportunity to cut rates. This will provide a tailwind at a time when most of the developed world is at 0 rates (i.e., anticipating future hikes). Brazil will need to reduce dependence on China for its primary source of commodity demand however, the Real devaluation should enable Brazil to be a low cost producer.
In short, removing Rouseff would address one of the major impediments to the Brazilian economy.
FL
SBS is moving up again this morning and is above short term resistance. Morgan Stanly put out a buy on emerging markets this AM. This could open the door for those who have been to afraid to venture into these markets.
Listner, I'm now in your boat and would just assume that we not revisit the 3's again. I'll need to figure out whether to continue to trade around a core position. I definitely believe in the long term fundamentals and see several positives.
1) stemming leakage/losses by infrastructure improvement and dealing with deadbeat municipal clients. At some point this will benefit the bottom line.
2) Hopefully El Nino addresses drought concerns this rainy season. as it typically results in very prolific rainfall.
3) The diversion project that will prop up Cantareira will be completed in 2017. So one more dry season to contend with before an additional 5m3/s becomes available. This should allow elimination or scale back of the usage restriction bonus program.
Regards FL
FL
GHDX was down 11% at one point possibly coincidental with Exas and/or ILMN (reduced genetic testing reimbursement) or overall biotech weakness.
Urology Review suggests that the Prostate test which recently received CMS billing code last month could fill a very unmet need.
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC4274174/
Looks like the diagnostic stocks that never had the run up are getting tarred with the same brush being used on the rest of biotech.
FL
Anybody catch Bernanke this AM? interesting comment about there being a prolonged bout of deflation during the 1870's thru 1900. This was attributed to improvements in transportation during the industrial revolution. The inference is that major technology breakthroughs create dislocations that take considerable time to work out. The internet and the many businesses it has displaced may very well result in decades of deflation in a manner similar to the end of the 19th century.
FL
Thanks Wow
I've only dipped a toe into the Brazilian market with SBS. I've steered clear of the EWZ since I have concerns on the potential components having too much debt denominated in foreign currency that has strengthened.
SBS has a cyclically adjusted PE of about 2.5, about 1/10 of many US water companies. They pay an annual dividend even during the drought when they offered economic incentives to cut usage. So I don't think the risk/reward is unreasonable.
FL
Unlike some other South American Countries, Brazil has shown an ability to rally out of past recessions. If they do not rally out of this one it will not be a good sign for the rest of the world. After years of currency devaluation they are in a position to be one of the worlds cheapest suppliers of many raw commodities. The pattern that I have seen is that Brazil does well when the world emerges from a U.S. recession. The weaker U.S. currency provides a tailwind since most commodities are priced in dollars.
Usually emerging market bonds will begin to rally before the equities. Therefore, I think it is early for most Brazilian equities probably a 2016 story.
My interest in SBS, is that it's share price is also depressed due to the Sao Paulo drought. This years El Nino resulting in early onset of the wet season, and the 2017 completion of a major diversion project to bring water from the Iguape River will largely resolve this issue. This should at the worse allow earnings to rebound to the historical norm. The other reason I like SBS is that the ADR is priced in dollars. Since the Real has been crushed v. the dollar, I'm betting that there will be reversion to the mean at some point.
The world seems to believe that emerging markets will be crushed by an eventual Fed decision to raise rates. But with 17 Trillion in debt, any normalization of rates would be disastrous for the US, since the interest costs would quickly become very consequential. Several economists are indicating that the dollar's strength in the face of this reality is the next bubble. Therefore, I'm interested in some investments that are not closely correlated to the dollar.
Regards FL
Yeah, even Brazil water companies. Actually SBS does good whenever the dollar takes a dip. So it is my Ron Paul -Stansberry Research dollar bubble play.
I'm starting to see several analysts suggesting that the intrepid investor can think about dipping a toe into Brazil. After being down in some cases 80% (pretty much 2008 lows) how much more downside can exist?
Regards FL
The SA piece is relevant to M-W this week. Thur and Friday was a rip your face off rally for the MLPs. several that I follow are up 15 to 20% in two days. This might very well be a bear market rally, but either way the sentiment changed from the time your information came out.
FL
SBS reducing operational losses. Everyone always talks about plugging the leaking pipes but municipalities that do not pay has been a problem that also added to the losses. In the US if you don't pay the service will be shut off. I get the impression that the Brazilians do not escalate as quickly. Either way it is encouraging that SBS is working to improve this key operational metric.
FL
http://finance.yahoo.com/news/sabesp-signs-agreement-municipality-santos-032500953.html
Today was ugly for the Brazilian Real. The currency has now lost 57% of its value since 2014. If we held SBS in local currency this would not be as painful. My original assumption of 3.8 8 was based on the Feb low adjusted for the currency conversion rate which I think was around 3.75 when I made the estimate. It is now over 4. The company fundamentals have not changed appreciably, in fact you can make the case that the fundamental situation has improved (2nd qtr earnings were better than anticipated, tariff increase, el nino drought relief, etc.).
So SBS is totally a bet an the Real/dollar relationship. The deterioration has accelerated and I think we are approaching a climax within the next month. The emerging market weakness extends beyond SBS. Take a look at the EDIV chart.
https://finance.yahoo.com/echarts?s=EDIV+Interactive#{"allowChartStacking":true}
The Business news is quick to attribute the problems to Emerging market fiscal imprudence or china. However, I think there is another explanation that is even more concerning. Perhaps Ron Paul and Stansbery research are correct and there is a bubble in the dollar. Quite possibly, the emerging markets are the most sensitive indicator of this situation. I'm not hoping that the USD has problems, but if this plays out as a rapid devaluation of the dollar then the emerging markets will be long term beneficiaries. The currency weakness will provide an export tailwind when demand picks up, and their is a lot of room for rate cuts which can be implemented to spur economic growth once the stagflation is under control. The situation looks analogous to the US in the Carter years. No one at the time would have anticipated that a 20 yr bull market was right around the corner.
I realize that none of this helps given the losses on our statements. However, I see this emerging market exposure as a hedge against the strong dollar. I will add a little more SBS (probably in the mid 3's given the currency situation). I'll probably use EDIV to fill out my emerging market exposure. I'm planning on making emerging markets about 20% of my portfolio in the next 6 months (maybe sooner).
Hate to say it, but the currency weakness, potential to decrease rates, the demographics and the debt profile (Brazil is about half the US debt/gdp ratio). All these factors make the emerging markets attractive. However, the transition may very well be a rough shake out. I still like the innovation in the US and will continue to selectively add technology on weakness.
Long Diatribe, but the current market reaction to the FED situation has to make one question all assumptions.
Good Luck
FL
El Erian on Emerging Markets. Once in a decade opportunity.
http://www.cnbc.com/2015/09/14/allianzs-el-erian-bumpy-road-ahead-but-will-create-lots-of-attractive-opportunities.html
This is a pretty screwed up environment. The Fed held off on interest rate increases supposedly due to concerns for the emerging market. Yet the emerging markets are likely to perform worse in the short term if Fama, French, Seymour are correct. The hedge fund managers like Seymour are looking for a signal that conditions are changing that would favor value (i.e., emerging markets) over growth yet the Fed holds off out of concern for these markets. I guess its a question of the underlying economy vs the traders looking for the market signal. However, one might argue that money flowing into the emerging market bond and stock markets would help lift the currency and thus benefit the real economy and not just the market.
FL
In a perverse way the Fed holding rates may be a short term negative for value stocks including SBS. A couple Nobel Laureate economists from the Univ of Chicago (Fama and French) showed that value stocks (of which SBS is most definitely) perform best when rates begin to rise. Seymour who follows Brazil closely said that the EWZ was likely to see another down leg and bottom in October. He had been looking for it to rally this week if the Fed hiked.
I'll probably use any strength tomorrow (due to temporary dollar weakening or otherwise) to either trade some shares or sell some call contracts. Hate to say it but if they are right we could revisit upper $3 range again in the next few weeks.
Regards
FL
try this link instead.
Quick link to a SBS post on the Demographic tailwinds board.
http://investorshub.advfn.com/boards/post_reply.aspx?message_id=116875781
I do not have any financial or other interest in IHUB, I just find the format (chronologically listing responses), the ability to attached links and the quality of the posts to be much better than yahoo. I also use investor village, but there wasn't an SBS board there.
FL
Kind of weird but SBS seems to have found a bottom and has been rallying slightly since the downgrade. What is the axiom about all the bad news being priced in.
It also could be totally non related. Sao Paulo is on track for a very wet September. So a lot of the drought fears are subsiding. This is a welcome time for a strong El Nino weather pattern.
FL
Not sure why the graph dropped SPY from the comparison. I'll try one fore time.
http://finance.yahoo.com/echarts?s=SBS#{"range":"5d","allowChartStacking":true}
The ability to trade around the core and sell calls has definitely made it emotionally easier to tolerate the volatility. The problem is you need to decide what percentage of you holding that you would be willing to sell which can also feel bad when SBS goes on an extended run (which we both believe it will at some point). I usually find that market volatility gives me enough chances to repurchase if I desire to.
SBS has been firming the last couple of days, and almost looks like it is becoming negatively correlated to the S&P (see chart below). Tue&wed last week and today SBS appears to be moving opposite of the SPY. On flat days not much happens. For me, this would be a positive if it persists, since I still have exposure to the US market. However, a week is to short to read too much into it.
http://finance.yahoo.com/echarts?s=SBS#{"range":"5d","allowChartStacking":true}
Regards FL
Tim Seymour Fast Money just stated that Brazil and Emerging markets will rally on a Fed rate hike. Said the hike is more than priced in and the uncertainty being lifted will act as a catalyst for these markets. Certainly counterintuitive, but is very similar to what I'm seeing in the currency markets (in terms of the inflection point being near).
Looks like early next week might provide another opportunity to add cheap shares, but if Seymour is right, the market could turn toward the end of the week.
FL
Watch to see if the support at $3.88 holds. Based on the historical pattern, the down +50% for 2yr pattern is fairly consistent with the long term conditions. So I think we are at or very close to the bottom.
It looks like the bad news (Moody's downgrade, unfavorable comparison to S. Calif) has been priced in already and the news has little additional effect on share price. Knowing your position, I would suggest designating a certain percentage of these low cost shares (say 25 - 50%) trading shares and use them to trade around your core position. Sell them during the run ups like we had earlier this year or sell covered calls out a month or 2. Buy again on the dips. This will help mitigate some of your feelings and make it easier to support the long term core position.
Good Luck
FL
Brazil Downgraded to Junk Status
S&P Downgrades Brazil to BB+. Bond auction has been canceled and parliment is openly disregarding Rouseff. Dilma looks to be on the verge of impeachment. Historically credit downgrade to junk has marked the market bottom in Emerging markets. Market is down 59% in local currency and ADRs even further due to currency weakness. UBS is saying there is potentially more downside for Brazil.
I'm continuing to bottom fish Shares of SBS based on the technical support, tariff increases, improving drought outlook, and based on the fact that I do not beleive that SBS debt is as vulnerable as is made out by the credit rating agencies.
FL
Link to Reservoir Status
http://www2.sabesp.com.br/mananciais/DivulgacaoSiteSabesp.aspx
Cantareira and Alto Tiete stand to benefit from the 5 m3/s diversion from the Iguape River, which should come on line in 2017.
https://en.wikipedia.org/wiki/Water_management_in_the_Metropolitan_Region_of_S%C3%A3o_Paulo
However, in the meantime the reservoir storage levels will be critical. The situation was extremely critical in late may 2014 when only 8.6% of capacity remained. If SBS can build storage over this wet season (which is projected to be very wet since it is an El Nino year), they should be able to negotiate the dry season in 2016 until the improvements are completed that will pave the way for a more reliable system.
SBS indicates that they may operate water and sanitation systems outside of Sao Paulo. Does anyone out there have a sense of how big a growth opportunity this represents. Given that Sao Paulo is the economic center of Brazil and it is not even fully served, new connections to the existing system would appear to be low hanging fruit.
Major infrastructure improvements/expansion will probably wait until borrowing conditions are more favorable.
FL
Looks like copper may be puting in a bottom. Copper is often considered to be the most economically sensitive of the commodities. Because Brazil is a commodity exporter with its currency tied to strength in the commodity market, this bears watching. Copper could easily drop again to retest its late August low. But if it doesn't it may provide an early indicator that emerging market currencies like Brazil might finally begin to firm up.
FL
Saw that several of the major reservoirs received about 50mm and are approaching the normal mean rainfall for the entire month of Sept, already. With the El Nino being as strong as it is, I think the next several months will generate above normal precipitation. I look at it as if SBS can generate enough reservoir reserves this rainy season and squeek through next year, the situation should improve in 2017 when the 5m3/s diversion project comes on-line.
I think the currency and drought have created a buying opportunity where the cyclically adjusted PE is 2.5 only 1/10th of the 25 average in the US market.
The bigger influence on SBS share price this morning appears to be the strengthening Real v the dollar (see Chart)
http://www.xe.com/currencycharts/?from=BRL&to=USD&view=1W
The IMF has once again called on the FED to hold off on rate increases. Perhaps that is helping the currency situation.
FL
Noticed that both graphs revert to shorter time windows. Choose mesal and max to see the time period I was discussing.
Thanks
FL
Hi listner
Sorry about bailing on Yahoo. I got pretty frustrated that they would not even allow me to cut and paste information from another site. I accepted the fact that they would not allow links but I thought they were making it impossible to support any statements.
I'm also pretty frustrated with the SBS share price drop. My average is around $5 but I've been averaging down today. My thesis is that the Brazilian Market and pretty much all other emerging markets are being hurt by 1) Quantitative Easing and 2) to a lesser extent the slowdown in China. However, the currency generally bends until it hits a breaking point, then rally's strongly. The attached chart shows the long term Real vs the $US dollar. The Real lows in 1998, late 2002, late 2008 and right now correspond to strong inflection points in the price of SBS (see Chart - unfortunately I could not find an index that allowed me to overlay the two). The ADRS for SBS are even worse since they are priced in dollars and the full brunt of the currency devaluation is apparent.
While I hate being down on this position, I'm comfortable adding for the following reasons: 1)it has a monopoly, 2) its procucts cannot be replaced, 3) it is getting tariff increases to recoup construction costs of dealing with the drought, 4) it's debt is denominated primarily in the Real and the Yen (both of which have been devalued extensively), therefore its operations are pretty immune from the currency weakness. 5) Most of SBS's debt does not come due until 2020 (see Morningstar). 6) Demographis support future growth - see Water Word Article about # of hook ups, and 7) Some very smart people are shareholders Baily and Grantham.
All that said the Fed, and Central bankers can extend this game longer than the average investor can hold out. Unfortunately the QE cycle is largely an attempt by older developed countries in the US, Europe and Japan to avoid sliding into a deflationary spiral. The problem is the debt in the developed world. The next step is likely to be even more weakening of the China currency. Eventually this race to the bottom will revive China's ability to export and Brazil'a ability to sell its commodities. If you beleive Ron Paul and his buddies at Stansberry Reseach, it will result in pronounced weakening of the $dollar. I'm not commenting on that, but I do beleive in the idea of reversion to the mean (both for share price and for currency) and I beleive that SBS will benefit from mean reversion. Whether this is the Dollar crisis that Paul predicts or just normal market fundementals, does not matter.
The market is trecherous everywhere right now. This is apparent since the stock market drop the last several weeks has not been accompanied by a corresponding flight to $US treasury bonds, probably indicating that China is selling treasuries. So for the time being the only place to hide out appears to be cash. If the dollar crisis plays out in the future, this will not be a good place to be.
What is interesting from the attached charts is the rate that SBS has pulled out of past recessionary periods. I'd encourage you to compare it to the SPY or the QQQ's to SBS. In an up period it will fly and might be hard to catch. I know my nature, and I hate buying stocks after a 20% up day. So I could see it geting away from me, since I'm afraid to chase. The long term trend line suggests a low just under $4.00. For these reasons, I've decided to ride it out and add to my position.
Good Luck
FL
PS- Welcome to IHUB, I posted a few times on the Natural resources- Global demographic tailwind board.
http://quotes2.enfoque.com.br/sabesp/flash/pt/index.asp
http://www.google.com/finance?q=CURRENCY:BRL
A couple interesting SBS links.
https://en.wikipedia.org/wiki/Water_management_in_the_Metropolitan_Region_of_S%C3%A3o_Paulo
http://www.waterworld.com/articles/2011/09/brazil-s-water-sanitation.html
This suggests (Contrary to Moody's recent claims) that SBS in investing in improvements. It also discusses the debt structuring. Note Ms. Pena is on the Board of Directors but is no longer CEO.
FL
GMO's Grantham and Elliot Managements Paul Singer have established sizeable positions in SBS. Both have great records as value investors. Why? The cyclically adjusted PE (earnings averaged over a 10 yr period is 2.65 vs approximately 10 times higher (about 25) for the US. Noble Laureate Prof. Schiller is ringing the bell about this issue.
The market concensus is that Brazil is untouchable and that may be true for most of the Brazilian market. However, despite Moody's proclamation today, SBS's debt is very manageable. About $41 million (at 7.5%) comes due at the end of next year. The bulk of the debt $350 million does not come due until December 2020 (6.25%). Only 40% of the debt is denominated in non local currency (Japan being the largest non-Brazilian holder of debt-Japan also has a weak currency). Japan is embarked on QE which should further weaken their currency. Therefore, loans made in yen terms should not hurt SBS due to the weakening Real.
Moody's claims that SBS is not investing adequately in the water reservoirs and distribution systems. Yet this ignores the programs to reduce leakage/pilferage (by next yr it should be less than 28%) down from 40% in 2011. Much of this is Municipalities that have not paid and are in collections. Leakage from pipes are being repaired/replaced. A large river diversion project is under construction that will provide 5 m3/s of additional supply to the critical reservoirs. Look at "SBS and Sao Paulo Water distribution system in Wikipedia". While wikipedia may sometimes contain errors they provide links to referenced sources. SBS has received two Tariff increases in the past year to deal with the costs of the drought. So the evidence shows that Sao Paulo is moving to support capital improvements to the water supply system.
In other words Moody's seems to have an agenda with their credit downgrade and comparisons to the LA water works. They were at the crux of the 2008 real estate credit buble, so I don't think they should be considered creditable.
The currency crisis similarities to 1998 are striking (i.e., attributed to emerging markets). Review the charts and observe how SBS rebounded from the 1998 crisis. It far outperformed the S&P or the QQQ's. The currency weakness is a function of two factors 1) China slowdown and commodity weakness but even more importantly is that it is a side effect of QE. The evidence of this is that even emerging markets that are not commodity dependent (i.e., Turkey, Korea, Thailand, etc) have all experienced significant currency weakening. To me it looks like Moody's agenda is steming capital flight. Currency strengthening and weakening changes used to occur slowly. Now a year or more change may occur overnight. Witness the 20% overnight change earlier this year when the Swiss Franc unpegged from the Euro. These type of changes may make it extremely difficult to be nimble enough to establish a position once a major shift occurs.
Enough of a diatribe.
FL
Cubs Curse?
The last time a pitcher from the Cubs threw a no hitter (Carlos Zembrano Sept 14, 2008) the S&P was down 20% a month later. It's beginning to look like Arrieta could generate a similar downdraft.
Just Joking. Not even 108 yrs of Cubs futility has any relationship to the market.
FL
Thanks Dew but the specific red tape is not discussed.
I'm interested in figuring out whether it is comming from the Feds, State of Sao Paulo or local officials. I view Sao Paulo as the Texas of Brazil, very free market wheras the central government is corupt.
I'm in the early stages of establishing a position in SBS. The majority of their debt is denominated in local currency, with Japan (the yen) as the next largest holder of debt). My feeling is that a water and sanitation company with a monopoly in a growing population area is going to have revenue stream reliability that will provide insulation from alot of the currency related contagion hiting the emerging markets.
I try to due alot of due diligence, but I'm always open minded about failures in my logic. So far the Deere example suggests to me that Deere has had a long history in Brazil and has committed to new factories there as recently as 2 years ago. I take that as a positive.
Macro perceptions of the political and fiscal mess in Brazil appear to create a buying opportunity that provides the opportunity to purchase companies at well less than book value. As long as Sao Paulo supports free market policies and does not confiscate or repatriate private assets, I beleive the opportunity is compelling (in sort of a Wilbur Ross kind of way). That said, it is extremely speculative and is limited to less than 5% of my portfolio.
Today is another serious down day in the market. These conditions generally mark turning points. It will be interesting to see what markets/companies become favored sectors for investment. Right now there is a decided investment bias toward growth. Might that change if there is a market reset?
Regards
FL
Tried looking into Deere's red tape difficulties but the Iowa L. Gov was the only link I could come up with discussing bureaucratic problems.
http://www.thegazette.com/subject/news/iowa-lieutenant-governor-reports-on-brazilian-trade-mission-20150501
Iowa public officials are probably not the best source since in 2013 Deere decided to move the 8R tractor plant to Brazil from Waterloo Iowa. Depending on where in Brazil the plant is located I don't doubt that there were hurdles to jump. There is considerable difference between the States, as well. Sao Paulo backed Neves in the election and many of the most vocal protests against Dilma are comming from this area.
Unfortunately for the US, some of the problems encountered by Brazil are more easily addressed than some of the problems in the US. For example:
Brazil demographics are better They have the youngest population of any G7 nation. Accordingly they have many more workers for every pensioner. On the negative side, Dilma largely won the election by offering pension benefits to workers as young as 55. This is part of the reforms that Levy wants to address that she does not want to go back on.
Brazil's current BACEN interest rate is 14.25%. At some point (probably next year they will be in rate cutting mode and this will be a tailwind that will likely last for years. The US will have the opposite side of the coin increasing or stagnant rates for a generation;
Brazil's debt to GDP is 59% compared to 103% for the US. With a much younger population they should have capacity to institute reforms without dire implications (i.e., huge tax increases etc). It is unclear how the US can avoid this scenario.
I don't have rose colored glasses on. I realize they need to find a solution to the trade imbalance since China is unlikely to lift them out of the rut. However, the magnitude of their currency devaluation may already be sowing the seeds for them to be more competitive. In the US the dollar has strengthened against most currencies in the world. Weakening the currency could require more QE (an unpopular scenario).
Unfortunately (for my Kids), the demographic tailwind looks to be at Brazil's (and most other young emerging market countries) back. They largely need to get the politicians out of the way. The US has been borrowing from its future, and in order to prevail in the future we will have to do it based on education, better business practices, spirit and innovation.
I haven't seen evidence that our politicians are up to the task.
Regards
FL
Quite possibly too optimistic. Sao Paulo and SE Brazil was anti Dilma in the election. But they are stuck with her like the rest of the Country. I'm just not certain how QE throughout Developed economies ends. If it is so easy to sidestep cleansing effects of recessions and depressions, then it would have been used more frequently. The past suggests that imbalances develop and will rear up at some time. Developed markets are at 0% long term rates. What is the next arrow in the quiver of the FED? or the EU (more QE?). Emerging markets have considerable room to cut rates to stimulate their economies. This was a major tailwind for the US economy in the 1980's. However, I think the trade gap will have to narrow before things look better.
The QE effect isn't just hitting Brazil; Vietnam, Turkey, Korea etc are all experiencing currency devaluation relative to the dollar. I think the currency adjustments will become a tailwind at some point (products get cheaper to export to world markets). Brazil and Asia (maybe excluding Mainland China) should benefit. What will keep the US dollar strong (the FED increasing interest rates?). More than likely, the party in power in the US would not mind seeing the currency weaken somewhat going into the election. Can this weakening be acheived in a controlled manner?
Trade imbalances are likely to develop if the US dollar stays strong long term. I think the currency tailwinds and Emerging Market turnaround is probably a 2016 story. However, they might provide a non-correlated investment, a bet I'm willing to make with a small fraction of my portfolio.
Regards
FL
I fully understand the political and economic situation that Brazil finds itself in. However, one really needs to examine the causes. The run away inflation largely corresponds to weakening of the currency (and to a lesser extent the drought) and not more typical causes (i.e., an economy overheating). These types of currency turmoils are often self correcting. I look at is as a hedge against the dollar experiencing an abrupt weakening. Because Brazil has an economy largely driven by commodities which are mostly priced on the world market in dollars, its currency tends to strengthen as the dollar weakens. During the last several worldwide recessions, Brazil has been one of the 1st out and has shown higher growth rates than the developed world. So I look at bottom fishing in water stocks there as a way of hedging the ongoing currency turmoil throughout the globe.
I'd worry more if the State of Sao Paulo was nationalizing or using heavy heanded policies instead of market approaches to dealing with the drought. They have approved extraordinary Tariff or price increases to recognize that water is now an increasingly more valuable commodity and users will have to pay up for it. The company is using this money for water diversion projects which will help meet the needs of this huge metropolis (project to add 5 m3/s will be completed in 2017). People that conserve water are getting a bill reduction or "bonus". This clearly seems to be a very market focused approach. Can we say the same thing about all the policies in the US? I distinctly recall winners and losers being picked by the government during the 2008 financial crises. Dilma's 8% popularity and the backlash against corruption could turn out to be a positive.
Nibbling in the face of a 75% reduction (in US dollars, much less in local currency) is definately early, but we are entering a world where currency minipulation results in changes that occur much quicker than any other period in my lifetime.
Regards FL
Thanks for posting the WSJ article. I agree with a lot of what they say about the China influence (in the form of boom-bust cycles) and the political situation in Brazil. However, there is not one mention of the effect that QE has had on Emerging markets. Several Fed bank governers have already acknoledged the negative influence that the carry trade has had on emerging markets including Brazil. My interest in Brazil is two fold:
1) the chance to pick up stock ADRs for monopoly companies that provide integral services beaten down 75%; and
2) these markets are inversely levered to the dollar. If the dollar starts to weaken due to any of the myriad of reasons out there, history has shown that they should be a beneficiary.
I think the recent market turmoil in the US has more to do with the anticipation of liquidity being removed (in the form of higher rates), rather than the concerns of China growth slowing. It is too remeniscent of the taper tantrum. Unfortunately, the market is going to make it difficult for the Fed to ever normalize rates. Increasing some of the speculative portion of my portfolio outside of the Developed markets that are practicing QE is somewhat of a hedge.
Regards
FL
The graphical analysis you posted has a lot of repercussions for MLPS dealing with storage and transmission of nat gas. If the trends hold and we have a cold winter it could be a big positive for nuclear power generators. Worth watching.
Thanks
FL
http://www.zacks.com/stock/news/180025/looking-for-value-why-it-might-be-time-to-try-companhia-de-saneamento-sbs
td Ameritrade indicates that both Zacks and Ford research (two top rated analysts) both rate SBS strong buy. Here is the Zacks link. Unfortunately Ford is proprietary.
if emerging market currency stabilizes against the dollar this week I'll add to my position.
FL