Soldalma

The Truth Behind the U.S Government's Stealth Stimulus Plan

Great post. Keep the good work.

Bright Future for Petrobras and Brazil

As a Brazilian with a Ph.D. in economics (MIT), a consultant to oil companies investing in Brazil, and in friendly relations with some of the big names in finance in Brazil I can dig a bit deeper than those who only read the WSJ and Bloomberg, so I am warning my fellow Seeking Alpha readers. Beware of people who know little about the political realities of Brazil.

There is widespread disappointment with the new investment rules that reduce the oil majors to the role of financial investors. PBR will operate all new fields in the pre-salt area. It does not have the expertise and the personnel to do that. A major oil person in Brazil retired from a high position in PBR told me that, and he says PBR cannot even handle what they got right now. And that is not the worst problem. The Ministry of Social Security and other entities are already making claims on pre-salt revenues that will not be available for a decade. Lula was explicit that the pre-salt money will be used for "social" purposes. Royalties were just increased from 10% to 15% of gross (!) revenues. In other words, shareholders are not the residual claimants of finance theory. Even if all this oil is extracted and sold there may be little left for the shareholders after all the other "stakeholders" get their "fair" share.

Yes, PBR can continue to go up due to hype, like tech stocks in 1999. If you want to bet on that, fine, but be aware that PBR is no value play.

Banks Run Out of Options in General Growth Properties

Still, if everything Todd says is true then GGP's assets are worth less than its liabilities (negative net worth). In this case the stock is an out-of-the-money call whose valuation is tricky (B-S formula, but which vol?). Not clear it's worth more than the current valuation, although in some scenarios it could be worth much more.

Galbraith: Have We Averted the Crisis?

The link is for an interview with a fellow called Greenwald.

Warning: The Coming Credit Dislocation

I think there is a solvency problem with US banks. But even in the ugly scenario painted by Mr. Denninger, why would the US dollar go up? Common sense suggests the opposite. My guess is he thinks people will go "into cash" and that will create demand for dollars. If that is the reasoning, it is an elementary mistake.

Brazil Gets a Little Nutty: Investment Survival in Emerging Markets

Somebody mentioned criteria for being classified as a "banana republic." High on the list would be having unsustainable public sector and current account deficits. Brazil does not qualify on those grounds, the US does.

In fact, if the US had taken measures to prevent its currency from appreciating a few years ago things could be much better nowadays in the Land of the Brave. Now the dollar is depreciating but a bit too late.

Brazil Gets a Little Nutty: Investment Survival in Emerging Markets

I just arrived in Rio and was told that there were many more dead after the 14 (including 3 policemen in a crashed helicopter) that were reported in the international press a few days ago. So it's business as usual.

But I am in the unusual position of having to praise the Brazilian government for something it did. The tax was a prudent measure that will raise some money and function as a signal. With the real at 1.70 exporters were struggling. Lex had some comments on the issue in today's FT.

The only problem is the tax will not stop the real from appreciating. Calls on BZF just after the news were a rare opportunity, with unreasonably low implied vols. With domestic small cap mutual funds up 160% YTD and even blue chips up more than 100% who cares about 2%?

Banco de Brasil and Santander Both Look to Take Advantage of ADRs

It is "Banco do Brasil," and not "Banco de Brasil." Please!

Petrobras: Still a Sure Thing?

The comment above on the currency effects of real appreciation is wrong. PBR's costs include a substantial portion of nontradables (labor, etc.) If the real appreciates these will go up in price, when translated to US dollars. On the other hand revenues will not go up (in dollars). If you do a calculation with pencil and paper you will see PBR is a loser in such a scenario. Of course that would mean it would gain if the real weakens.

Petrobras: Still a Sure Thing?

You can buy PBR and go on a ten year cruise. There is even some chance that the company will be around when you come back. There is also a good chance that its assets have been stripped, that it has been renationalized (leftists in Brazil no longer think of PBR as a state-owned enterprise, as most of the shares are privately held), or that the minority shareholders (meaning you) have been robbed.

PBR will need $300 bn to invest in the pre-salt while the government is doing what it can to alienate foreigners. I am a consultant to a foreign oil company seeking to invest in Brazil and what I hear about the recent changes is not pleasant.

There is no way the political elites in Brazil will allow PBR shareholders to get most of the upside (assuming there is one) from the pre-salt. In the best scenario shareholders will do well, but under no circumstances they will be allowed to make a killing. It is not politically feasible. In the bad scenario they are the ones who get killed.

PBR is not even close to being in the same league as PG and JNJ. It is at best a punt, and not a safe investment.

What the GM Volt Means to the U.S. Economy

230 MPG? Puleeeze! If you believe that I have some nice land in the Moon for sale.

While Retail Sales Decline, FHA House Sales Soar

The FHA itself is the Mafia leader, since it is lending with only 3.5% down. The philosopher Georges Santayana said that those who do not learn from the errors of the past are condemned to repeat them. in the case of the FHA they are not learning from the errors of the present.

Petrobras Can Go Down Even if Oil Goes Up

Good article. There is no guarantee that PBR shareholders will ultimately benefit from the "pre-salt" oil even if oil prices stay high. As I stated in previous comments, there are all kinds of groups in Brazil trying to get that booty. PBR is no longer seen as a public sector company by leftists within the Lula administration, as more than 50% of the shares are privately held. Other groups are not so ideological: they only want to line their pockets. Analysts' spreadsheets are worthless. They only apply when the property rights of shareholders are well protected.

Petrobras Ready to Benefit from Next Oil Price Spike

Michael,

I have several problems with your arguments:

1) Finance theory states that the value of a stock is the discounted value of dividends. If the prospects for dividend payments by PBR are not good then the shares are overvalued. Of course if one wants to buy for other reasons like "oil production growth" that is fine, but that is not my investment philosophy (I don't want to run the risk of not finding a "greater sucker").

2) You stated that "the price PBR receives for its oil exports ... will grow dramatically once tupi is tapped." Oil prices are determined by international supply and demand and not by Tupi's level of production.

3) I never said that PBR was going to be nationalized. The chance of that happening is remote. What I said is that politicians will milk PBR in a variety of ways. This is already happening and will continue to happen.

4) If the Brazilian currency appreciates, as you expect, PBR's profitability will suffer. International oil prices are quoted in US dollars and are not affected by the USD/BRL rate. So the value of PBR's export revenues would not be affected. On the other hand, PBR's production costs would increase when measured in USD.


On Jun 11 08:41 AM Michael Fitzsimmons wrote:

> Mmarrrk: thanks. i hope SA publishes it today, but i should have
> worked up the investment angle a bit more (they like that).
>
> Soldalma: you're certainly correct - i don't speak portuguese and
> haven't read a brazilian newspaper. you're also right in that i should
> not have neglected the political risks in the article. i have read
> about most of the issues you mentioned, except for the details of
> the election - so thanks for that. now i'll take the other side of
> the debate: with respect to gas and diesel price manipulation inside
> brazil, this will not affect the price PBR receives for its oil exports,
> which will grow dramatically once tupi is tapped. wrt the dividend,
> i mentioned that PBR is not an investment for the dividend, which
> i agree there are much better oil investments if dividends are what
> you are looking for (BP and STO for instance). however, PBR is an
> oil production growth story (i.e. earnings) and that is what i think
> will drive the stock price. finally, i believe another tailwind will
> be the brazilian currency, which longterm i think will strengthen
> vs the US dollar. now, if brazill nationalizes PBR, or turns toward
> venezuela, then you're on to something. however, with the need for
> capital in order to make the huge investments needed to tap tupi,
> i'm not sure that will happen. however, it is certainly a risk -
> so thanks for highlighting that. here is an article that discusses
> the gas/diesel pricing issue as well as bidding for offshore oil:
>
>
> finance.yahoo.com/news...
>
>
> the political environment adds risk, but the risk/reward payoff may
> be a good reason to invest in PBR as its share price does not reflect
> its reserves nor the coming increase in production.

I'm (Intellectually) in Love with John Bogle

John Bogle paints himself as a champion of the retail investor, but in reality index funds are very damaging to all investors.

Index funds can charge low fees because they are free riders. Other investors do research that create ballpark values for stocks, index funds take advantage of that. If all investors switched to index funds stock valuations would be completely arbitrary: any price vector would be self-fulfilling.

One of the main functions of the stock market is to serve as a signaling device, with stock prices reflecting the underlying economics of listed corporations. Index funds dilute that information and are socially damaging institutions.

Some people argue that mutual funds are inferior to index funds because 85% of mutual funds underperform the index. This reasoning is misguided. The underperformance is the price paid by society to have meaningful valuations for stocks.

Bottom line: there should be a tax on index funds, the proceeds could be used to subsidize stock research.