Thursday, 11 December 2008

Are Electricity Generation Companies Defensive Stocks in Brazil? Uhhmm ...

According to Brazilian newspaper Valor Economico, prices in the electricity spot market have tumbled 15 percent in recent months. Large industrial power consumers are selling part of their electricity contracts for 2009, on expectations that growth will decelerate -- leading to less consumption. If future electricity consumption can be regarded as a powerful leading indicator, then the lower power prices present us with the painful and inevitable prospect of a slowdown in the Brazilian economy.

If small investors were betting on defensive stocks such as utility shares to help them navigate through a very uncertain 2009, then they may be wrong. Eletrobras, the state-controlled energy company, as well as Cemig, Copel and Cesp will probably be the most affected as a consequence of declining spot prices, because they might be entitled to smaller-than-expected tariff revisions. Also the fact that the government is so obsessed with the idea of expanding the industry at any cost may lead to oversupply -- and the likelihood of losses for a prolonged period.

Before this scoop by Valor, I was almost sure that these companies (electricity generators) would be good picks for 2009, partly because of their status as defensive stocks. I was expecting them to win decent tariff increases along next year and 2010, due to the effect of the real`s decline (some of their costs are linked to the dollar.)  Analysts at Morgan Stanley warned they might revise down their earnings estimates for some of these companies, citing the economic slowdown and the prospect of smaller tariff revisions.   

Ecuador Recompra Deuda ... Poco Despues de Llamarla `Ilegal'

Un reporte del diario El Comercio de Quito, citando fuentes extraoficiales, dice que el gobierno ecuatoriano habria comprado cerca de $680 millones en bonos, via Banco del Pacifico. El reporte dice que las recompras comenzaron alrededor del 15 de noviembre (dia en que le gobierno anuncio que se acogeria a un periodo de gracia de treinta dias para decidir si pagaba o no intereses debidos a los tenedores de deuda de su bono Global 2012.)

Converse hace poco con un inversionista de Wall Street al respecto. La pregunta aqui seria, esta el gobierno de Rafael Correa haciendo algo ilegal, o inmoral? La respuesta es, si, ambas cosas. El gobierno lleva mas de un ano haciendo terrorismo con este asunto de los bonos. El anuncio del dia 11/15 hizo que los bonos cayeran a niveles cercanos a los $0.30 por bono. Se presume que el gobierno se aprovecho de esa caida para hacerse a los papeles. 

Ecuador podria ser demandado si esto llegase a ser comprobado. Ahi surge una nueva pregunta: Ecuador tendra activos en el extranjero que puedan ser blanco de una confiscacion, como lo que acontecio con Venezuela despues del liod e la nacionalizacion de los proyectos de la Faja del Orinoco? ... Eso se lo dejamos a los bondholders interesados.  

Brazil's Central Bank Signals Rate Reduction Soon

Yesterday, Brazil's central bank (BCB) kept its benchmark overnight interest rate unchanged at 13.75 percent. The decision was followed by an avalanche of criticism by trade unions and business groups, which allege that high borrowing costs in Brazil (a recent study by the BCB showed that Brazil had the world's biggest credit spreads, followed by Colombia) are inhibiting economic activity and will only make the country hostage to the current global recession. Hours before, the goverment said that the Brazilian economy grew almost 7 percent in the third quarter, when the impact of the crisis hadn't been felt entirely. 

The decision was right. One former central banker told me last night, minutes after the decision, that he believed the central bank looked outside Brazil to take the decision. Russia, another BRIC country like Brazil, has wasted almost a third of its international reserves trying to stem its currency against speculative attacks. Almost every single EM country has had to intervene in the currency market to avert a drop in their currencies. Credit to the riskier sovereign governments is disappearing. While the inflation picture in Brazil is far from rosy, it is likely that the BCB saw the size of the current account deficit for 2009 -- and how to finance it -- as the problem, the source said. The global slowdown will probably hamper Brazilian exports. And the BCB doesn't want to repeat its actions of 2002, when it had to provide companies with trade financing after it dried up. Inflation will eventually come down, the source told me, and such drop will open leeway for a rate cut, maybe in March. 

In the meantime, let's leave trade union leaders and entrepreneurs balking at the BCB for being prudent. There was certainly intense debating inside the bank's Copom (which stands for the BCB's Monetary Policy Committee.) Directors spent almost four hours deciding what to do with the Selic rate (the longest meeting in more than two years!) 

Brazil is faring better than many countries during this crisis. But it doesn't make the country's policymakers immune to mistakes. The crisis has shown that markets are applauding those who are imprudent with the use of taxpayers' funds to fight it, and those who have yielded to prudence have been punished. Let's hope the Brazilians can set a different example. 

Welcome Note

Hello dear readers: 

The idea of creating a blog wasn't entirely mine. It came up as an idea that I didn't quite endorse it at the beginning, when I and a couple of good friends were discussing the depth and impact of the current credit crisis that we are now enduring. These two friends, both of them market professionals, complained about the lack of access that common people have to insightful information on financial markets. The three of us were worried about the pace at which the crisis was unfolding, and how millions of people would suffer the consequences of it. I have to admit that I couldn't disagree more with their views about the scarcity of accurate, insightful information on finance and economic matters until I realised myself how badly explained are the market facts that affect the world everyday. During the course of this crisis I have witnessed people dear to me losing their money and, in several, painful occasions, their jobs. I have seen people misled by greedy stockbrokers and, much to my discomfort, listened attentively to government officials pledging to fix what can hardly be fixed. 

The main purpose of this blog, thus, is to collect and publish the views of different, well-informed and knowledgeable people in the finance world about the facts of today, and how their evolution will likely affect the economy of tomorrow. It is also my plan to help give readers a perspective on news stories that we read in the papers but dare not to question, or simply lack the time to analyse properly. Another goal is to explain the recent process of re-nationalisation of the private economy undertaken by several governments in the region, and what the possible implications of such moves are for common citizens like you and me. 

The posts may include comments in English, Spanish and Portuguese. I will try to make most comments in English, but sometimes I will make use of my native language (Spanish) and the Portuguese language to get through the ideas I want to express. In a way, this, I believe, will help all of us integrate better and produce an interesting product -- always in the best interest of the blog's readers.

I really hope the outcome of all this, that started the night I talked with my friends, helps you dear reader better understand the current situation. I intend this to be a space where you readers as well as I can learn from one another.    

Enjoy!

Guillermo