Monday, 29 December 2008

A Stone-Cold Sober Voice in Brazilian Markets, Finally ...

Check this out, dear readers:


Brazil Stocks Won’t Gain in 2009, Real May Fall 20%, Nehmi Says
By Paulo Winterstein and Laura Cassano

Dec. 29 (Bloomberg) -- Brazilian stocks may not gain next year and the real will fall another 20 percent against the dollar as a global recession curbs demand for commodities, said Victor Nehmi Filho, whose hedge fund beat 99 percent of its peers.
“The Bovespa has no strength, and I see no reason for it to have strength. People talk about this as a crisis, with a rebound. But this is more of a recession than a passing crisis,” said Nehmi, portfolio manager at Sparta Administradora de Recursos Ltda. in Sao Paulo. “There’s still room for another drop in the real in 2009, especially during the first half.”

Bloomberg reporters Paulo Winterstein and Laura Cassano were quite right by pointing out the latest bear voice, as our dear investing community stays hopeful that 2009 will be a better one. Winterstein and Cassano provided us in their story with a bit of a size and scope that makes the interviewee a worthy speaker in the matter: Nehmi´s fund this year beat 99 percent of his peers in the hedge fund industry (there are about 6,700 funds of that kind in Brazil, according to Anbid, the investment-banking and securities industry association.) It is interesting to see that there´s finally a sober guy in the domestic capital markets. Clearly, as we have pointed, the number of Brazil analysts pointing to a mild deceleration grows by the day while the number of doomers remains small (too small.) Click here to see a document on Sparta´s performance, which I found on the Internet and I suppose is public information.

One of the most prominent voices among the bears, Morgan Stanley economist Marcelo Carvalho is, contrary to most his colleagues, expecting a recession to hit Brazil in the second quarter of 2009. The dismal behaviour of certain stocks often thought as ''defensive,´´ and the fact that the central bank may cut rates as early as next month are all signs of bad times for growth.

Well, we stand by our predictions: buy more fixed-income, buy no stocks for a while. Keep your stocks positions defensive. And there´s little Lula can do to prevent the inevitable.

Brazil and The Sovereign Fund (Update)

As we in this blog humbly said President Lula would do, Brazil´s government overruled the authority of Congress and established, through the use of a decree measure, the fundraising scheme for the Sovereign Wealth Fund of Brazil (FSB.) It is a lousy move as, for the first time in more than a decade, the government is selling debt without having a corresponding revenue on the pipeline. It is also drawing money from the national savings destined to pay Brazil´s $600 billion debt to pay for expenses that aren´t necessary: the extension of aid to Brazilian companies to buy assets overseas, and the localisation of important, profitable investments in the local and global markets.

There are two things that we would like to highlight here: first, we would like to refute the government´s argument, which says the fiscal impact of the fund will be nil. That is partly true. The government, as one economist told me, is selling bonds to pay for primary (operational) expenses, not to pay for financial expenses (debt refinancing.) With the decree, the government scrapped a part of the law passed by Congress last week that prohibited feeding the fund with money from debt sales. Mistake No. 1.

The second thing is, how can you submit regional governments to obeying the Fiscal Responsibility Law if the federal government is overruling it to create an unnecessary tool of populist spending? What we mean by this is, states and municipalities are forbidden by the LRF to issue their own paper and sell it to investors. This is moral hazard.

Lawmakers will resume their duties at the start of Feb. We hope that they study this issue profoundly, and deeply. That decree, which has to be passed by Congress (or rejected) within six months of its publication, is bad at a time Brazil begins to feel the pinch of the global crisis. It would be irreponsible if Congress doesn´t revoke such decree.

Earlybird Dec. 29, 2008

Headlines for Dec. 29:

WORLD -- Israel Launches Third Day of Attacks in Gaza: (Reuters) Obama must include this subject at the top of his agenda. Today, oil is surging on concern this conflict will disrupt supply. Again, more events of this kind add to volatility.

LATIN AMERICA -- Madoff Investors in Latin America Keep Mum: (WSJ) Would it be disastrous for regional markets that investors and banks disclose losses linked to the Madoff scandal? I can hardly believe it. Private banks and some funds might have invested with Madoff, but we are far from witnessing such disclosures triggering a broad impact in local financial systems. As the story suggests, weak domestic regulatory controls allowed these investors to hide their exposure. Again, it is imperative that countries such as Colombia and Peru overhaul their corporate governance and financial disclosure practices right away.

BRAZIL -- Lula to Announce New Anti-Crisis Measures in January: (Estado) The crisis is President Lula´s favourite subject these days. The crisis has, all of a sudden, show his real face -- he is desperately looking for excuses to increase the state´s grip in any sector that he deems as ''strategic.´´ The concern, some economists say, is to have Brazil running out of ammunition as the crisis unfolds. Credit isn´t flowing, inflation is slowing rapidly and exports are dropping considerably. Recession signs, they call it. But there are things Mr. President can´t avoid. Why not making an effort to bulk up fiscal savings at this point, and reducing debt more rapidly, so interest rates can fall more consistently and quicker? More debt issuance and state-expansionary policies should be announced; Lula said the package will be announced by Jan. 20. Nathan Blanche, the trader who created the derivatives market in Brazil three decades ago, criticised in an interview with Estado yesterday the central bank´s foreign exchange market intervention policies, saying they failed to ease volatility.

COLOMBIA -- Pyramids Scandal Continues, and the Government Response Remains Timid: (Tiempo) Tonight is the deadline for investors on the DRFE pyramid company to file for compensation. The first time I heard of a pyramid company bursting was in August -- and so far the government hasn´t issued a single rule tightening controls on illegal fundraising by these type of companies. Financial regulation is a weak area of Colombia´s economy, and foreign investors should remain attentive to development on this issue.

PERU -- Gasoline Price to Fall Next Year, Garcia Says: (Comercio) This is interesting. An importing country plans to reduce gasoline prices, a move that will subsidise fuel consumption by a few citizens but, as opposed to what is predicated by populist politicians, usually fails to go down the market chain and ease the fuel companonet on the poor´s cost of living (I never saw food and rent prices coming down because of a drop in gasoline.) But the Peruvians have room to do it: for years they have been disciplined enough to bulk up their fiscal savings, so they can afford to keep gasoline subsidised for a little longer. In Colombia, a recent study by the central bank showed that it is necessary to eliminate subsidies (which implies prices should stay at similar or higher levels in 2009.) That is also prudent. For a country that´s on the verge of losing its oil self-sufficiency status, dismantling the current policy would be a mistake.

VENEZUELA -- Chavez Will Radicalise if He Loses Referendum on Presidential Term Limits: (AP) When Chavez lost the referendum on Dec. 3, 2007 and promised to accept his defeat, we said he would radicalise his positions. People listened to his softcore speech and refused to believe he would do it. Herman Escarra (I might be wrong, but I am sure he was a Chavez supporter and the mastermind of the 2007 defeated referendum draft) told AP the most likely scenario is a radicalisation. I agree with him -- the important loss of popular endorsement that Chavez is suffering can only be reverted (in the president´s erroneus view) by radicalising. In the meantime, the government passed an unreal budget for 2009, which will put more pressure on economic authorities to devalue the currency. Raising local fuel prices is becoming necessary. How long is this guy going to withstand the pressure?