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Guest Notes From The Sales Desk - Can Brazil Get Its Groove Back?

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Submitted by Brian Rogers of Fator Securities

Can Brazil Get Its Groove Back?

“Ever since I was a little girl I always heard Brazil was the country of the future. Now that the future is here, I am starting to fear it will be brief,”
- Cynthia Benedetto, the chief financial officer of Brazil’s flagship manufacturing firm, Embraer SA, the world’s No. 3 jet maker

Is the Samba Beat in Brazil A Little Off-Key These Days?

From my recent conversations with emerging market portfolio managers, it is becoming quite clear that the enthusiasm investors had placed in Brazil as a domestic growth story earlier in the year is running thin.  Buy why is the bloom coming off the rose? 

Some of the things portfolio managers are saying range from an experienced small-cap Latam buyer who said, “Inflation, Mantega going Don Quixote fighting wars that nobody creates other than themselves with high inflation.  There is just no visibility,” to a large global fund manager who said, “I am in Brazil this week, it’s slowing down here for sure...”

Banco Fator head of equity research Lika Takahashi made some very insightful comments this morning on this topic.  In her view, there are couple of factors.  First off, valuations in Brazil remain high.  Especially considering that it’s likely the global slowdown coupled with high inflation domestically will crimp margins going forward, something she believes is not fully priced in yet.

Another reason Lika highlights is the diminishing strength of the domestic growth story in Brazil.  Earlier in the year there was a big emphasis on the growing domestic theme in sectors like apparel, consumer electronics and housing. 

If you compare the returns on the IBOV with the S&P, Brazil trounced the US by 13% from June 2009 to April 2010 (+51.5% for the IBOV vs +38.5% for the S&P).  QE3 kicked in from Sep 2010 to approximately June 2011.  This was the period when a number of IPOs launched in Brazil, many focused on domestic stories.  During that time period, Brazil massively underperformed the US during this timeframe by -29% (-10% for the IBOV vs +19% for the S&P).  Even during the latest European “hopium” bounce from early September 2011 to now, Brazil has underperformed the US by about 2% (+10.4% for the IBOV vs +12.3% for the S&P).

My sales trader, Mark Webb, is also highlighting the premium, or rather lack-thereof, between ADRs and local shares.  Typically the average premium is somewhere close to 2%, while today it’s only around .4%.

So you’ve got the domestic story losing steam while the central bank keeps cutting rates which has many concerned about an inflation rate that is already running above the upper band of the central bank’s target.  Investors generally unhappy with the level of visibility from Dilma and Mantega on future economic actions.  Meanwhile, the strong commodity story is also falling flat as concerns abound about an imminent collapse – hard, soft or otherwise – in China.  Since China has replaced the US as Brazil’s number one trading partner, you can bet that any pain felt there will be shipped overseas to the land of caipirinhas.

Wither Brazil?

Hardly.  Yes, they are likely to have an inflation problem to deal with, particularly when the US Fed launched QE3 in earnest.  Yes, they are going to suffer as China inevitably slows down.  Yes, massive government spending is needed on infrastructure projects to boost productivity and in tried and true corrupt fashion, much of this will end up in the pockets of politicians and their sycophants.  And yes, all of the above could lead to stagflation. 

But here’s the joke, so will every other country on the planet.  And in most places, the damage will be much worse.

Over the long run, do you really think the US will be able to outperform Brazil?  Our government is massively over-leveraged and quickly surpassing the Rogoff-Reinhart threshold for eventual default.  Our consumers are also saddled with boatloads of debt and weak job prospects to service that debt.  Our monetary policy as dictated by the Oracles at the Fed is bloated beyond any reasonable expectation of what was originally expected when the Fed was created in 1913.  Our corporations, while “loaded with cash” as is frequently stated on the financial news channels, are addicted to manipulated low rates.  How competitive will our corporates be when rates begin to rise meaningfully in the US?

What about Europe?  Are they better off?  Not even close.  It remains to be seen what’s going to happen regarding the EFSF and the bank recapitalizations, but no matter what road they take, it’s likely the unintended consequences will overwhelm any plan they glue together.

How about Asia, meaning China and Japan?  China has been working overtime building non-productive assets in a massive “make-work” effort.  Problem is, the non-performing loans associated with all of that growth is going to be huge.  At some time, there will be a big bill to pay in the form of their own bank bailouts and when this day comes, you can kiss their $3tr in currency reserves goodbye.  Some think the Chinese will never, ever sell their Treasuries.  Good luck with that view.  Once the domestic situation in China deteriorates as they are unable to generate enough jobs building unoccupied malls, unused roads and bridges to nowhere, they will sell so fast your head will spin.

And Japan?  Over 200% debt/GDP.  History is clear on this one, it will end in tears.  It may take longer than most economists think but it’s coming.

Keep the Faith

Despite the current negative environment for Brazil as discussed above, the country remains one of the best emerging market destinations on the planet, relatively speaking, of course.  Brazil can boast of solid demographics, huge commodity resources and more flexibility with their monetary and fiscal policies than almost any other economy of comparable size.  The domestic story may have slowed but it’s far from dead.  In fact, over the long haul, Brazil’s population of 200 million consumers will keep demanding a better diet, higher quality education and better housing.  With this in mind, investors would be well-served to use these downturns to scoop up bargains in the domestic sector. 

Perhaps that buying opportunity isn’t today, we’re still a long way away from the Great Reset.  But in a world where fiat currencies are devalued and consumers over-leveraged, it’s going to be commodity rich Brazil and their young population that will do the best on a relative basis.

Cheers,

Brian 

* Fator Securities LLC, Member FINRA/SIPC, is a U.S. entity and a member of the Fator group of companies in Brazil. Any personal opinions stated by employees of Fator Securities do not constitute the opinions of Fator Securities or the Fator group of companies.

Fator Securities LLC is not affiliated with Zero Hedge or any third party mentioned in this communication; nor is Fator Securities LLC responsible for content on third party websites referred to in this communication.

This material was not prepared by Fator Securities LLC. U.S. Persons seeking further information must contact Fator Securities LLC in New York at (646) 205-1160. This material shall not constitute an offer to sell or the solicitation of any offer to buy (may only be made at the time qualified participants are in receipt of the requisite documentation, e.g., confidential private offering memorandum describing the offering, related subscription agreement, etc.). Securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful or until all applicable regulatory or legal requirements of such jurisdictions have been satisfied. This material is not intended for general public use or distribution and is intended for distribution only to appropriate investors. The opinions contained herein are based on personal judgments and estimates and are, therefore, subject to revision. Past performances are not indicative of future results.

 


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Fri, 10/21/2011 - 16:20 | Link to Comment mayhem_korner
mayhem_korner's picture

Over the long run, do you really think the US will be able to outperform Brazil?

Innovation and entrepreneurship are mobile - the US is fast becoming an unfriendly state to both.  So "no" is the answer.

Fri, 10/21/2011 - 20:22 | Link to Comment trav7777
trav7777's picture

Brazil has a lot of lazy people and corruption.  It's why they've been the country of the future for 50 years.

Meanwhile the evil white nations just keep chugging along.

Sat, 10/22/2011 - 07:11 | Link to Comment johny2
johny2's picture

man, you are full of shit. 

Fri, 10/21/2011 - 20:59 | Link to Comment Buck Johnson
Buck Johnson's picture

Your correct.  Also Brazil was the next country to go to that was friendly to the west that wanted to be like the west.  So they did the same thing the West did and are cooking their own economy to become a burnt out economy.

Fri, 10/21/2011 - 16:23 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

A little O/T, but you see LOTS of Brazilian made goods in Peru.  LOTS of trucks!  Lots of transportation related goods.  Beer.  Other goods actually used by Peruvian manufacturers as well.

Fri, 10/21/2011 - 16:23 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

'Yes, they are likely to have an inflation problem to deal with, particularly when the US Fed launched QE3 in earnest.'

Lets first see how that gets handled before concluding:

 

Perhaps that buying opportunity isn’t today, we’re still a long way away from the Great Reset.  But in a world where fiat currencies are devalued and consumers over-leveraged, it’s going to be commodity rich Brazil and their young population that will do the best on a relative basis.

Australia, Russia, Canada, Mongolia, Norway etc. these countries would also qualify as resource rich and have cheaper fiat to promote export.

Fri, 10/21/2011 - 17:34 | Link to Comment topcallingtroll
topcallingtroll's picture

All of what you say is true but brazil has a young and growing population and little debt. None of those other countries have both.

The others you mentioned are fully valued to over valued.

Brazil appears to be undervalued based on its long term risk.

Fri, 10/21/2011 - 18:21 | Link to Comment EvlTheCat
EvlTheCat's picture

topcalligtroll,

I would like to know how much you travel, and are involved in Brazil?  To find it such a good investment.

In my opinion Brazil is a debt bomb waiting to go off.  Many people I know are overleveraged with the easy credit provided to them inorder to spurr economic growth.  On top of this the ecomonic infrastructure to pursue fraud is almost non- existant.  That may be one reason your perception of debt is so low?

It may seem like a killing field for investments, and it probably is to the unscrupulous, but long term they look like the U.S. to me.  With one big difference, Brazilians thrive on unscrupulous behavior. Can you?

Fri, 10/21/2011 - 20:26 | Link to Comment trav7777
trav7777's picture

Brazil's problem is that they are even more wealth stratified than we are.  Professionals are underpaid compared to prices and oligarchs are overpaid.  If they want to broaden their economy, they are going to have to route less money into billionaires and more into ordinary professionals. 

Additionally, brazil is hamstrung by a huge black population which does pretty much what every other black population everywhere else does.  The cities in the south such as Curitiba are vastly different in terms of HDIs and levels of corruption and crime than further north.

Brazil, instead of limiting professional and technical immigration, should be paying for it.  Bring in more white people, asians, and indians.

Fri, 10/21/2011 - 16:25 | Link to Comment TheLooza
TheLooza's picture

Um.  My ashole is bleeding from today's melt-up.  Why is it so much easier to lose five figures than it is to make it?  Fucxk me.

Fri, 10/21/2011 - 17:03 | Link to Comment Manthong
Manthong's picture

I tend to look at the positive side of things.

If I lose enough, I just get to go back to using drugs, hanging around in bars and carousing with the kind of women I gave up to get to where I am now.

Fri, 10/21/2011 - 17:09 | Link to Comment JohnG
JohnG's picture

This has been the case since trading began in time immemorial.

Call it.......TUITION.

Fri, 10/21/2011 - 17:34 | Link to Comment NotApplicable
NotApplicable's picture

Because you're competing against the world's premiere criminal cartel with both hands tied behind your back, while blind-folded.

Meanwhile, your so-called stop-loss order is their tree-shaking target.

Personally, I find sniffing glue to be more productive.

Fri, 10/21/2011 - 20:07 | Link to Comment 4shzl
4shzl's picture

Meanwhile, your so-called stop-loss order is their tree-shaking target.

Always.

Fri, 10/21/2011 - 16:33 | Link to Comment BRIC-layer
BRIC-layer's picture

Brasil also has one major and rather unique policy plank  going for it: an active targeting of the Gini coefficient, alone among major economies. This will continue to work wonders in the medium term when allied with it's demographic advantages.

Brasil is also relatively immune to a lot of the social pressures confronting heretofore ädvanced"economies. There is an optimism and dynamics reminiscent of the US in the 1950's in a lot of the country.

Having lived through similar crises in the 1980s and 1990s, the Brasil Banking system, as well as it's participants, are far better prepared to confront any stresses from the 2008 Depression.

Fri, 10/21/2011 - 20:29 | Link to Comment trav7777
trav7777's picture

I'll agree with you on the optimism.

The problem is that social spending didn't work here and won't work there to remedy fundamental aptitude gaps between populations.

The chicks are hot and like white guys.  That's enough for me to think about moving there.

Fri, 10/21/2011 - 16:32 | Link to Comment buzzsaw99
buzzsaw99's picture

This from someone who all they want to do is exploit Brazil to make more clownbux. who. the. fuck. cares.

Fri, 10/21/2011 - 17:24 | Link to Comment topcallingtroll
topcallingtroll's picture

Clownbux still have value for now and owning "things" such as pieces of companies with an overweight in natural resources cant hurt, even if clownbux go the way of the dodo.

Fri, 10/21/2011 - 16:33 | Link to Comment moskov
moskov's picture

How about USA? not only non-productive but the biggest sinkhole ever recorded in the history of mankind

Fri, 10/21/2011 - 16:49 | Link to Comment Sudden Debt
Sudden Debt's picture

I also think we'll have to wait a pretty long time for the big reset in many countries, but not for the big meltdown. 2 years at mpst is my guess unless we get brasilian like rates above 10%

Fri, 10/21/2011 - 16:50 | Link to Comment CHARLIE.DONT.SERF
CHARLIE.DONT.SERF's picture

Brazil's real estate market is way over heated.  According to this article http://www.bloomberg.com/news/2011-06-21/brazilians-buy-miami-condos-at-bargain-prices-after-45-surge-in-currency.html the average square foot in Leblon, RJ is over $1000 while it is $354 in South Beach.  Any global shock could burst that bubble as quickly as you can say "fudeu".  

Fri, 10/21/2011 - 16:52 | Link to Comment RobotTrader
RobotTrader's picture

Will they?

Or won't they?

If Brazil and China announce easing measures at the same time the Eurozone comes up with a "Bazooka" plan, the meltup next week in the equity indexes could be breathtaking.

But most of you should not worry, because gold and silver will go up with it, as PM's will also benefit from the coming "Economic Boom of Epic Proportions" in 2012 - 2015.

Fri, 10/21/2011 - 17:19 | Link to Comment topcallingtroll
topcallingtroll's picture

Wrongo robo.

If you wont be a troll I will.

Once some growth resumes and if europe manages to bring out a bazooka there will be a huge melt up.

Gold and silver may participate initially, but once fear is gone and people are convinced inflation is staying muted pm's will do well to eke out small annual gains.

High beta is the way to play this if you think there may be a melt up.

Brazil is high beta with excellent value and fundamentals. Cant get better than that long term.

Fri, 10/21/2011 - 17:13 | Link to Comment topcallingtroll
topcallingtroll's picture

Valuations remain high?

Bullshit. EWZ has an almost seven percent yield and PE of 8.

These same fund managers are recommending Chile with a dividend yield of 1.8 percent on the main ETF. They were bullish at 76 but now are bearish at 58? Fucking idiots.

Brazil's problem is their fear of inflation and underestimation of their true growth potential. However they are lowering interest rates and high growth will resume.

The time to buy is now but dont bet the farm. Dollar cost average over the next couple of years. Hold forever. Brazil is a buy and forget investment. Check it again in ten years. The first world is japanifying. Second and third world is place to be.

Fri, 10/21/2011 - 17:24 | Link to Comment Monedas
Monedas's picture

Electing an ex-Communist Guerilla bitch as President is not my idea of good PR ! The New World Latins have the sickest, most conceited and myopic faith in Socialism ! They just don't get it and no one challenges nor ridicules them for it.....except for Monedas 2011 and a few other visionary comedians !

Fri, 10/21/2011 - 17:28 | Link to Comment topcallingtroll
topcallingtroll's picture

There is plenty of untapped OPM to keep the socialists funded for a long time.

For the next ten years, at least, brazilian socialism and a great ROE can coexist peacefully.

Fri, 10/21/2011 - 17:35 | Link to Comment NotApplicable
NotApplicable's picture

Don't forget the upcoming UN taxing authority. Once that takes hold, Hell won't seem quite so bad, after all.

Fri, 10/21/2011 - 21:01 | Link to Comment Monedas
Monedas's picture

I'm really out of the loop ! What's ROE ? UN Taxing Authority ? You mean some of these "emerging" nations are going to receive taxes from other countries ? There is no end to the filthy business of Socialism ! Monedas 2011 Schweinfurt Ball Bearing Works am Main

Fri, 10/21/2011 - 18:02 | Link to Comment youngman
youngman's picture

They left out corruption...and Brazil has plenty of that...and it works in a slowing economy as well as a growing economy...steal it ...its the easy way to make the millions...

Fri, 10/21/2011 - 18:10 | Link to Comment spanish inquisition
spanish inquisition's picture

I am shocked. Once I started hearing about the Brazil investment miracle from supermodels and rap stars, I thought "Wow, skys the limit".

Fri, 10/21/2011 - 19:28 | Link to Comment buzzsaw99
buzzsaw99's picture

when i started hearing "emerging markets" every two seconds i knew what was coming.

Fri, 10/21/2011 - 21:09 | Link to Comment Monedas
Monedas's picture

We need to use the Spanish Inquisition as a model for liquidating the Socialist filth ! We need to put a bounty on their heads....payable in PMs, por supuesto ! Monedas 2011 I volunteer for the death panel !

Fri, 10/21/2011 - 20:48 | Link to Comment Monedas
Monedas's picture

Everythings comin' up roses ! Soon Brazil's Afrikan population will exceed that of Afrika due to robust demographics in Brazil and Muslim extermination of Black Christians in Afrika ! Monedas 2011 Comedy Jihad Holocaust Hoe Down

Fri, 10/21/2011 - 22:06 | Link to Comment Monedas
Monedas's picture

In summation:  The Red Cross, Bleeding Heart Christian Charities and Hollywood Guilt Merchants provide food aid to Sub-Saharan Muslims....whose governments deny aid to starving Christians who wander the Savannah and get so weak they die or are easy to mow down ! I call it "Open Range Genocide"....minimal infrastructure required ! Monedas 2011 Comedy Jihad Cost Effective Genocide

Sat, 10/22/2011 - 21:17 | Link to Comment forgetalpha
forgetalpha's picture

Let's not make this complicated...

Decoupling=bullshit

BRICS=leveraged bet on equity market rebound

Brazil = not China

Reliance upon China + Chinese RE collapse = everyone is screwed

everyone is screwed = brazil is screwed

Relative value works on a consistent basis, oh wait, that's right...never

Have fun trying to explain this bloated sales pitch to an over caffinated (among other things) HF trader...or better yet, to a HFT algo. The zeroes and ones have a great history of applying relative value arbitrage to their trading strategies right?

Also...can we please stop with this nonsense that China HAS to sell all of their US Tsys in this grand fell swoop in order to save their economy and/or screw the US....screwing over one of your top trading partners has always been a great strategy....also, if China sells all of their Tsys in response to whatever retarded scenario you assume, then the greatest trade balance in modern history would be decimated in nanoseconds...you know what happens when China sells their Tsys? The greatest tool in modern economic history for global trade dominance (otherwise known as the USD peg for RMB) will be destroyed and the RMB would appreciate at an extreme rate, simultaenously destroying China's export industry and everyones paper thin margins to begin with.

Better luck next time, Brian of Fator...I hope you and the Fator Group of companies in Brazil manage to sell this obvious  sales pitch to the fat dumb and blind investors of the world, otherwise known as retail investors and the 'responsible' financial "advisors" that represent them.

Sun, 10/23/2011 - 00:03 | Link to Comment GoinFawr
GoinFawr's picture

"We're all in this together kid" Harry Tuttle, Heating Engineer

Sun, 10/23/2011 - 01:09 | Link to Comment Grand Supercycle
Grand Supercycle's picture

SP500 weekly chart shows megaphone wedge and looks bullish.

Market consensus became clearer on Friday so back to the original bullish analysis and SP500 weekly chart reverts to bullish/neutral.

More info:
http://stockmarket618.wordpress.com

Do NOT follow this link or you will be banned from the site!