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“Brazilian Bubble” provides the investment community with an unbiased perspective on Brazil and other Emerging Markets. We share investment ideas, market reports and economy analysis with our readers that the mainstream media and analysts leave largely unnoticed. We don’t care for the bull side... More
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  • Brazil's FX Reserves: What's the REAL number?

    Last month, Brazil's government surprised the world when it said that it was prepared to lend reserves from the nation's central bank (NYSE:CB) to help finance the rescue package for the European Union. The Brazilian government would allegedly lend the money through a bilateral agreement with the IMF. A government official said also that, technically, Brazil's reserve levels, which it claims to stand at around US$350 billion, wouldn't change. Instead, they'd just be held at the IMF.

    Well, perhaps it is time to explain briefly what these US$350B+ in reserves really mean.

    The much touted growth in the Brazilian foreign reserves, must be very carefully looked at. Brazil's total debt has grown rapidly since 2007 (see graphic below). This can be explained by the high degree of external financing by the private sector (NYSE:FDI) and international funds transfer for investments such as the Brazilian stock and money markets. The net assets, in dollar terms, however, are only close to US$50 Billion if one subtracts debt (US$300B) from reserves (US$350B).

    Although about half of the reserves are longer term government debt that will be stable in a financial crisis of some sort, the rest of the reserves can be extremely volatile. In fact, this volatility could be seen clearly this year between last July and October, when the BRL/USD almost touched 2.00 after a massive capital outflow. The CB then intervened and the FX stands at about 1.75 now. Brazil experienced such a scenario (in higher proportions) in 1998 when half of its foreign reserves evaporated in few days, which caused a huge currency devaluation and short-term interest hikes in excess of 40%. Of course, now the country's financial situation is much better than in 1998 when Brazil's CB had a huge net negative assets on its books.

    The main point here is that the Brazilian government might be over-extending itself when it says it wants to aid Europe - these types of statements must always be taken with a grain of salt.

    Nov 17 8:25 PM | Link | Comment!
  • VALE (NYSE: VALE): China or Bust?
    Iron ore’s biggest decline in 15 months may worsen as the economy slows in China, the largest importer, the European debt crisis persists and BHP Billiton Ltd. (NYSE:BHP) and Rio Tinto Group increase production, analysts said. 
    Having said that, here we post a "gloomy" presentation slide from the world's most famous short-seller, Jim Chanos, about the "bear" case for Vale, the Brazilian iron-ore giant. Apparently, he believes VALE is a not a good investment (perhaps a short?), as it is correlated to the China growth story and the brazilian government. Read his VALE summary and opinion below:

    1. Cyclical peak creates impression of value
         - Forward P/E 5.1x, operating cash flow margin over 45%
         - $160/ton iron ore price more than 5x 30-year historical average

    2. Capital expenditure inflation is soaring
         - 2011 budget of $24B; up 85% over 2010

    3. Questionable capital allocation - VALE Navy
         - 12 Chinamax 400k dead weight ton very large ore carriers ('VLOCs')
         - "It's not our policy to make money in freight" - Jose Carlos Martins, Vale Executive Officer of Marketing, Sales & Strategy

    4. Enormous exposure to uncertain Chinese demand growth
         - China accounted for 43% of Vale's iron ore sales in 2010, up from 29% in 2008
         - Reliance on continued fixed asset investment growth in China

    5. Brazilian Government influence on strategic decision-making
         - Key driver of economy - iron ore exports accounted for 17% of total exports in 2010
         - Recent resignation of CEO Agnelli amid rumored tensions with newly elected government
    Tags: VALE, EWZ
    Oct 24 1:49 AM | Link | Comment!
  • What's Next for Brazil Equities in Q4? Here is some insight...
    Increased risk perception. Recent macro and microeconomic decisions are curbing the visibility of investors. On the macro front, concerns are on the 50bp BCB cut on the Selic while the Focus survey points to 5.5% inflation in 2012. On the micro front, measures such as the IOF tax on FX derivatives, the revision of the mining code, and the new tax on imported cars add a new layer of uncertainty to valuations.

    Brazilian equities are cheap and will remain there. Brazil is now trading at an 8.3x PE ratio, which is an 18% discount to its past 3-year multiple and a 10% discount to GEMs. Compared to local rates, one can find equities at a 21% discount to fair value. This is due to increased risk perception and it will remain so until inflation expectations are well-anchored and the micro policy noise diminishes.

    Buy inflation. Investors should buy stocks that provide insulation from rising inflation. We are still believers in growth, but now prefer plays with lower risk.

    Sector shifts: replacing consumer and retail with acquirers and malls. We like the acquirers and malls as plays in the domestic economy that offer a diversified revenue base, inflation protection, and either credit growth (in the case of acquirers) or hard assets (malls). We prefer to stay out of consumer and retail names.

    Watch out for the BRL devaluation. The risks for a BRL depreciation have increased and this may catch investors short as this theme has been off the radar screen since early-2003 (except for a short period during the 2008 crisis). Investors may consider currency hedge as they put their money into Brazil.

    Takeaway: Brazil equities are cheap (see chart below) and EPS expectations are low, but the global market risks are still high, the BRL is volatile, and the country needs to sort out inflation. It can get even cheaper in the short term. Consider Banco Itau Unibanco (NYSE:ITUB). Stay away from commodity plays like Petrobras (NYSE:PBR) and VALE. Shorting EWZ could also be a good speculative hedge.

    eps growth
    Source: HSBC

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: EWZ, VALE, PBR, brazil, equities
    Oct 20 2:57 PM | Link | Comment!
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