Companhia Sanea (SBS)

[flatlander_60048]

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