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Ulysses de la Torre
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Ulysses de la Torre is an independent emerging and frontier markets consultant in Mexico City. He maintains a blog at and a Twitter feed @divergingmarket.
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  • Political Risks Facing Mexico's Televisa [[TV]]

    Those with a stake in the landmark reforms underway in Mexico EWW are advised to read closely the 20-F form Televisa TV recently submitted to the Securities and Exchange Commission.

    The full document is available here, but of particular interest is the "Risk Factors" section of item 3, which is chock full of warnings. Some select passages follow.

    From page 9:

    Political Events in Mexico Could Affect Mexican Economic Policy and Our Business, Financial Condition and Results of Operations

    It is possible that the new administration will pursue significant amendments to Mexico's laws, regulations, public policies and government programs. Mexico's current President Enrique Peña Nieto and the three main political parties of Mexico (i.e. PRI, Partido Acción Nacional, or PAN, and the Partido de la Revolución Democrática, or PRD) have signed the Pacto por México, or Pact for Mexico, in which they have agreed to pursue amendments to applicable laws in order to achieve, among others, the following purposes: (NYSE:I) provide the Comisión Federal de Competencia, CFC, or Mexican Antitrust Commission, with the necessary authority to prevent and stop monopolist practices; (ii) achieve increased competition in the telecommunications business; and (NASDAQ:III) open public bids to grant new concessions to offer television broadcasting services. Consequently, changes in laws and regulations, public policies and government programs may occur in the future. Such changes may have a material adverse effect on the Mexican economic, social and political situation, and on our business, financial condition and results of operations. See "- Mexican Antitrust Laws May Limit Our Ability to Expand Through Acquisitions or Joint Ventures", "-Existing Mexican Laws and Regulations or Changes Thereto or the Imposition of New Ones May Negatively Affect Our Operations and Revenue" and "- The Recent Constitutional Bill Being Debated at the Mexican Federal Congress, if Approved, May Have an Adverse Effect on Our Business, Results of Operations and Financial Condition".

    From page 10:

    Imposition of Fines by Regulators and Other Authorities Could Adversely Affect Our Financial Condition and Results of Operations

    A significant portion of our business, activities and investments occur in heavily regulated sectors. Recently, Mexican regulators and other authorities, including tax authorities, have increased their supervision and the frequency and amounts of fines and assessments have increased significantly. Although we intend to defend our positions vigorously when procedures are brought or fines are imposed by authorities, there can be no assurance that we will be successful in such defense. Accordingly, we may in the future be required to pay fines and assessments that could be significant in amount, which could materially and adversely affect our financial condition and results of operations.

    From page 11:

    The Recent Constitutional Bill Being Debated at the Mexican Federal Congress, if Approved, May Have an Adverse Effect on Our Business, Results of Operations and Financial Condition

    If, as expected, the bill submitted in March 2013 by the House of Representatives (Camara de Diputados) to the Senate to amend the Mexican Federal Constitution with respect to the radio, television and telecommunications industries and the strengthening of the competition and telecommunications authorities (the "Telecom and Antitrust Bill") is approved by two-thirds of the members in attendance of both Chambers of the Mexican Federal Congress and a majority of the State legislatures of Mexico and published by the President, some of these amendments and the implementing legislation may materially and adversely impact our business, results of operations and financial condition.

    The rest of the risk factors can be read in full here.

    Given the politically charged environment in which media reforms are taking place in Mexico, it seems safe to say this is more than just a boilerplate risk disclosure. Televisa leadership clearly saw the writing on the wall as far back as last year - the network was absolutely instrumental in helping Peña Nieto get elected to begin with. But nothing of this sort comes without strings attached. And while Peña Nieto may appear to be biting the hand that fed him, there should be no doubt there's another shoe somewhere waiting to drop.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Tags: EWW, TV, long-ideas
    Apr 18 10:04 AM | Link | Comment!
  • How To Navigate Argentina's Black Market In Foreign Exchange

    It is no secret that Argentina is now a two-tiered society. There are those with hard currency for whom the standard of living is quite cheap, and who are therefore immune to chronic inflation as their dollars and euros appreciate even quicker than prices. And then there are those without hard currency, and they live a precarious existence, to say the least: they cannot save their pesos, and even if they could it would be pointless as inflation rages on despite government insistence to the contrary.

    This dichotomy is not limited to individual survival either. Even corporate interests are increasingly at the whims of Argentina's foreign exchange regime. Recent reports have detailed a variety of short-term workaround solutions that companies are resorting to in order to comply with more import restrictions and tighter capital controls, among them, an electronics company venturing into the fishery business and a BMW subsidiary exporting leather, grape juice and rice. Suffice it to say, the companies comprising the Global X FTSE Argentina ARGT ETF are not immune either and to better understand the prospects for ongoing exposure to Argentina's economy, a more thorough examination of the country's currency policy is in order first.

    At both the individual level and the corporate level, flagging confidence in the national currency and ever tighter regulations on foreign exchange means the only way to acquire a meaningful amount of hard currency is to pay a rising premium in the black market. This is potentially a much larger subject, particularly when discussing it at the corporate level, so my aim right now is to briefly discuss the ramifications of Argentina's foreign exchange regime from the perspective of how it affects cash flow management at the household level, with an eye toward addressing this at a corporate level at a later date.

    Those unfamiliar with the street level workings of Argentina's informal economy may be surprised to learn that such transactions can be conducted in an otherwise regulated bureau de change in broad daylight. Each bureau de change has its own way of going about off-balance sheet transactions, but one example I am aware of is to walk in and simply ask if "Roberto" is available to change money. The customer is then brought into a separate room behind the storefront, and offered an exchange rate that as of this writing is quickly approaching eight Argentine pesos to the dollar for as much volume as the customer cares to exchange.

    Commercial enterprises are increasingly offering two sets of prices, though they may not openly advertise this. In restaurants, the bills are all in pesos. A customer wishing to pay in dollars must ask for the manager. Any competent restaurant manager has a price. He tells you what his exchange rate is, and you take it or leave it. Generally, the commercial enterprises accepting dollars are places selling goods and services that don't require a receipt. And provided one isn't fussy about the receipt, paying in cash rather than credit card earns an immediate discount in many places. A decent dinner for two with wine might cost somewhere in the A$300-350 range, or US$50 to those with dollars, but a crippling amount for a local earning in pesos.

    The government's recent intervention to control price increases in a number of supermarkets is a worrying sign. Meanwhile, importing anything is becoming trickier. The borders have an ever-longer list of prohibited items. At some point it will presumably be easier to just list the permitted items. Argentines face a 15 percent tax on purchases overseas with a domestic credit card, and are almost entirely prevented from foreign cash withdrawals, rendering foreign travel rather awkward without succumbing to a 50 percent black market premium. It should not be surprising that domestic tourism during the current southern hemisphere summer has brought along with it brutal traffic and chronic gasoline shortages, as holiday destinations abroad are beyond reach for all but the wealthy. To what extent this has a direct impact on ARGT is impossible to pinpoint exactly, but it's safe to say that such punitive restrictions have an indirect impact on companies exposed to Argentina that can be described as deleterious at best:

    (click to enlarge)

    Meanwhile the spread between the black market rate for dollars versus the official rate continues widening. The following chart, whose latest data is from the second week of January, is already outdated:

    (click to enlarge)

    How quickly the black market rate diverges from the official rate from here is anyone's guess, but the direction appears irreversible in the foreseeable future. The latest rate as of this writing according to Dolar Blue suggests the dollar is fast approaching A$8.0, while the euro bid/ask midrate appears to be crossing A$10.0. Given that the EURUSD rate has been hovering in the 1.30-1.35 range, the black market ARS cross-rates make sense. The main news here is that the premium is breaking new ground at 50 percent over the government-controlled rate. Let's also not forget that in Venezuela the ratio of official to unofficial rate is multiples of this: the official rate was 4.3 bolivars to the dollar up until last week, when it was devalued to 6.3, for a 32 percent decline. Meanwhile, the dollar fetches 19 bolivars on the black market there, a spread which has also continued widening over the years.

    Needless to say, such a currency regime fuels a self-fulfilling prophecy. Anyone in Argentina with dollars sells only what they need, in anticipation of further declines in the peso. For those on the other side of the transaction, buying dollars at a 50 percent premium is rational if the spread is believed to widen further, and most Argentines do not have to cast their minds back too far to remember precisely such a situation. During the 2001-02 corralito, the government devalued the dollar from 1:1 to 4:1, representing a 75% drop practically overnight. The official rate today continues on a fairly linear decline, but to speculate that the black-market rate could easily double or treble the official rate, as it has in Venezuela, does not seem implausible.

    Holding pesos in a bank account spells nothing but trouble if there is a devaluation or if tax authorities start asking too many questions. Conventional wisdom has it that depositing any amount of dollars or depositing more than 5,000 Argentine pesos at a bank "arouses suspicion" from local tax authorities. Explanations are not exactly easy to come by, but the consensus logic based on my own research seems to be that large deposits are indicative either of income (which in most cases is not taxed) or illegal money changing. Anyone with peso exposure faces devaluation risk regardless of where or how the pesos are held, but tight scrutiny from Argentina's Federal Public Revenue Administration (AFIP) is as good a reason as any not to deposit money in banks.

    Of course, the government has the last laugh, since anyone applying for legal dollar purchases is constrained by their declared income. And the less income people declare-for whatever reason-the less hard currency people are legally able to buy.

    Those with access to overseas funds, for example via a foreign credit card, will pay extra for the luxury of accessing them from Argentina. ATM withdrawal fees are about A$20 per transaction, with a limit of A$1,000 per withdrawal, making the minimum commission possible 2 percent. Further eating away at foreign bank accounts is that these pesos are exchanged at the official rate. So on a US-based credit card, for example, A$1,000 costs about US$205. On the other hand, anyone bringing US$205 in cash to Argentina should have no problem finding someone in the black market willing to pay at least A$1,500. Paying directly for goods and services with a foreign credit card avoids the ATM fee, but is still charged at the far less attractive official rate. A wiser course of action is to leave the country briefly, withdraw local currency in any normal country on the planet, change this to dollars on the spot, and then return to Argentina to sell these dollars on the black market. For as long as Argentina adheres to the Warsaw Convention, anyone can bring in up to US$10,000 in cash without any questions.

    Ecuador is the nearest country that issues dollars directly from the ATM, and airfare between Buenos Aires and Quito can cost close to US$1,000. Those intending to exercise this option are strongly advised to bring back US$50 and US$100 bills into Argentina as they command a better rate than lower denominations. Alternatively, commission rates for cash withdrawals on a US debit card in Chile are remarkably fair--less than 1 percent by my calculations. I suspect withdrawing cash in Uruguay would not be far from the Chile experience but I have no evidence yet on this one way or the other.

    Argentines without foreign bank accounts or access to hard currency are in an unpleasant position, and those I have spoken to are well aware of this. Their options are limited, and only by negotiating higher salaries (thus fueling inflation) can they offset the effects of escalating inflation, if only temporarily. In the worst cases this has led to rioting and looting, stretching as far south as Bariloche shortly before Christmas.

    Many anticipate more such behavior. It is unclear whether these riots in Bariloche were strictly about survival, as the typical items stolen were television sets rather than food, but crime is certainly up across the country and is the main topic of conversation when discussing the perils of Buenos Aires. As more people resign themselves to the reality that their only obvious means for protection is by paying a premium for dollars on the black market, the premium will have to go yet higher.

    The past may not be the most accurate predictor for what lies ahead, this much we know. But when a country's foreign exchange regime cannot be described as anything but backward, the prospects for improvement move ever further into the future.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: ARGT, forex
    Feb 12 6:36 AM | Link | 1 Comment
  • 20 Things Besides Facebook Worth $100 Billion

    20 Things Besides Facebook FB Worth $100 Billion

    "A billion here, a billion there, pretty soon you're talking real money." - Everett Dirksen

    1. China's total defense budget - The Hindu

    2. Apple's AAPL cash reserves in the first quarter of this year - Technorati

    3. The amount of American student loan debt taken out last year - NY Daily News

    4. The face value of fake US government bonds seized in a 2009 northern Italy raid - Bloomberg

    5. Nominal Gross Domestic Product of Bangladesh or Angola in 2011, according to the IMF - Wikipedia

    6. Saudi Arabia's recent solar energy investment - Motley Fool

    7. Qatar's Sovereign Wealth Fund - SWF Institute

    8. The entire government budget of Iran - CIA via Wikipedia

    9. The entire government budget of Iraq - Reuters

    10. US exports to China CYB, FXCH - China Daily

    (click to enlarge)100 billion Zimbabwe Dollars

    11. France's holdings of Italian sovereign debt FXE - New York Times

    12. Bilateral trade between the US and India INR - Economic Times of India

    13. The estimated value of the smart grid market by 2020 - Telecom Engine

    14. The position in asset-backed securities and structured debt by the JP Morgan JPM unit responsible for the $2 billion hedging loss - Reuters

    15. The amount of investment expected in the Arctic circle in the coming decade - Dow Jones

    16. The valuation difference between BP BP and Royal Dutch Shell - Dow Jones

    17. Global mobile data revenues - Mobile Marketing

    18. Nigeria's planned spending on oil and gas exploration for the next five years - Bloomberg

    19. Miami's trade with the rest of the world - World City

    20. Turkey's TUR planned energy investment over the next decade - Turkish Weekly

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: AAPL, BP, CYB, FXE, INR, JPM, TUR, FB, ipo-analysis
    May 21 11:20 AM | Link | Comment!
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