Brazil, the Bovespa Index, PBR and Me

Yesterday I was watching Petroleo Brasiliero (PBR) fight with US$116 and feeling all pleased with myself about the short at $124. I'd pencilled in a $10 drop at the time, and at one point there was less than a buck to go for my target cover price. Nice quiet day, I thought.

So I went to make some coffee and do other things. I couldn't have been away from the screen for more than 10 minutes. PBR had shot to $121. “Strange...”, I thought.

It turns out that while I was away, super duper stockpicker Ken Heebner had been on CNBC and gave PBR the full bull treatment. And that guy is good...gotta be said. And people listen to him (which is a little silly after the fact, as Heebner owns 2m PBR at $88 and $95, but sheep is as sheep does, Forrest). Whoosh! Up she went, almost touched $122 and dropped back. "Good," I thought, "the hot money has now rushed in...we'll drop back to $118 or so by the end of the day." (Click charts to enlarge.)

Then came part two. Ken wrapped up his segment, and out of the blue S&P ratings announced they were raising Brazil's credit rating into the investment grade category. You can see the second spike on the PBR chart, but have a look at this BOVESPA index chart and take a wild guess as to the exact timing of the news:

Yep, the whole index went up 6.33% on today's news. Which is great stuff for Brazil, and you can catch what happened to the Brazil ADRs on this link (very green), but it didn't do my Petrobras short any good at all.

So PBE closed at $121 today, and I saw most of the profit wiped out in a flash. And y'know what, that's ok! I'm happy for Brazil, that's for sure...this investment grade should have been granted a while ago, I think. But with the massive jump on the news, and hype going round with title lines such as "..heralds new age of investment...", methinks the Bovespa will have to cool its jets a little in the shorter term.

Looking at what happened to the Peru stock market in the days that followed its recent upgrade should give a ballpark idea of what's about to happen to the Bovespa (but with a heap more money flowing around, of course).

It's also nice to be reminded there are a million ways of losing in this game, just as there are a million ways of winning. And just when you think you got all the bases covered is just around the time the unknown variable tends to kick in....for example a country-wide ratings upgrade right on the back of a top guru recommending a stock. Hey...no harm done...the trade is still in profit, and there's no way I'll be letting it run into loss. But just imagine if you had 51% of your portfolio in that PBR short instead of less than 1% like me......a quiet reminder to keep eggs out of one basket, especially in the volatile world of LatAm stocks.

Disclosure: Short PBR, long some stocks held inside the Bovespa index.

Comments

[VWinner]

What the author apparently doesn't know is that the downturn in oil prices doesn't effect Petrobras much- which is why it was one of the only big oil cos to see a positive price movement today.

As Petrobras is mostly state-owned- its prices are regulated----BUT- LULA (Brazil's President)- authorized big price hikes LAST NIGHT. I bought Petrobras and made a killing. Not only that but the entire country's debt was upgraded to investment grade by SandP yesterday- which opens the doors to a lot of new money.

Watch Brazil explode over the next few monts.

A great way to play it is the Ishares etf- EWZ

[whiteowl]

You missed at least two other catalysts for yesterday's action: the Brazilian currency gained 2.6% against the USD, and as the previous poster stated, PBR was granted big increases on the prices it can charge for diesel and gasoline.

The first point is GOOD for PBR as they are spending billions in the shipyards of the world and are also import light sweet crude to feed their refineries. Also, strength in the reai vs USD means a higher price on the ADRs.

Your trade didn't work. Move on.

[VWinner]

Good call- whiteowl- I forgot to mention the real- and I know first-hand- my wife is Brazilian -and whines about it every day......

[buyitcheap]

whiteowl absolutely correct, the currency moves just prior to the equities - look at the Yen/S&P correlation that's enlightening... and if you're watching volumes, buying started just before Heebners announcement in the options perhaps off the currency(?). For money management purposes, with a $7-$8 gain in your short, I always trail a stop for half the gain so that if it turns on me like this one, you get out with at least half your profit. Tough one, but the damage is minimal which means an "affordable" learning experience.

[MarceloBrazil]

I dont think that the hikes in prices had anything to do with the movement on PBR on these last 2 days .... These hike was largely expected by the market, even with 10% hike petrobras still have its prices about 15/20% behind the rest of the world.
S&P Upgrade -- Expected by the market as well, maybe not that soon and this news got a lot of people short on Brazil and Latin America.
Short term this upgrade doesnt change much thing in my oppinion, first for a country to be considered InvestmentGrade it takes 2 Agencys grading the country Investment grade, so Brazil isnt INVESTMENT GRADE yet, but will be soon.
At the same time that a country wich receives IG receives money from funds and other financial institutions that must invest on IG countries it looses money from institutions that seek high yields investments, and this count (Money in - Money out) is not yet well understood.
IG is sure GREAT GREAT news, but in long term, brazilian companies can borrow money from international market much cheaper now, its easier for them to negotiate contracts worldwide, but the effect will take at leats 1 or 2 years to show on balance sheets ....

But as i said couple of days ago .... if you dont have PBR on your portfolio you should .... if you have KEEP it and buy more when the market give you a good opportunitie (and it gives from time to time)...
Also works for RIO (vale do Rio Doce) another great Brazilian companie...

anyone who wants to discuss about international companies can reach me on [e-mail]...

[ottorock111]

what makes you think i lost money? You guys up North never fail to make me laugh