Tag Archives: brazil

Don’t Ride The Roller Coaster, Bet On It

With global markets (esp. EM) stumbling, the upcoming FOMC meeting, political instability worldwide, and weak US domestic data, it may be time to bet on an increase in volatility. September through December are going to be some of the most volatile months in the year. Several options for investors: ETFs/ETNs that track volatility, such as TVIX, VXX, UVXY, derivative strategies, or going bearish/long-term on stocks. What a summer it’s been and September is only half-way over. Just overnight (as of Sept. 14th, 2015), Asian markets dipped again on poor economic data, with the mainland Shanghai Composite (SHCOMP) ending on -2.67% (at one point, nearly falling under 3k) and the Nikkei Index falling under 18k at -1.63%. Unfortunately, for international investors, this is not news . With the stock market crash that started in June and the subsequent desperate attempts by the Chinese authorities to prevent the crisis from getting any worse, everyone can at least agree on one thing: the ‘Asian century’ is faltering (for the brief three decades that it lasted) and the annual 8% GDP growth figures are a thing of the past. And considering China’s is a pseudo-market system run by an aging regime that grew up out of the throes of Mao’s Great Leap Forward and Cultural Revolution, recent events should come as a surprise to no one. From the real estate sector to the financials sector, China has been one giant bubble bound to burst. Below is the SHCOMP 1yr with Jean-Paul Rodrigue’s ‘phases of a bubble’ superimposed. (Source: Bloomberg Business) As to be expected, capital investment has been pouring out of China as illustrated below. And China’s isn’t the only market international investors need to be worried about. All of the emerging markets, especially the BRICS, are going to be very volatile. Between Brazil’s immense debt and failing presidency or Russia’s falling ruble and dependence on oil , emerging markets are going to be in quite a lot of pain in the coming months, especially since central banks are running out of options as most have already exhausted their QE (quantitative easing) measures. (Source: JPMorgan) (Source: Reuters & NASDAQ) Speaking of central banks, on September 16th-17th, the Feds will finally meet, in what was probably one of the anticipated and over-analyzed FOMC meetings in recent times, to discuss the results of their votes on a Fed rate hike. As grossly aggrandized as the possibility of a rate hike has been, it is an important element to consider, especially since EM countries gobbled up so much dollar-denominated debt back when it was cheap. Not only that, but the private-sector credit to GDP gaps in EM countries is growing fast; China’s alone is off 25.4% from its long-term trend, the highest of any major country, with Turkey and Brazil following close behind with 16.6% and 15.7%, respectively, far above the recommended ratio of less than 10%. A rate hike, which the CME Group predicts is a 75% probability for the upcoming meeting, is going to add to the enormous strain that the financial sectors of these countries will face. All of these factors piling up seem to spell doom-and-gloom for the rest of the world, but what of the U.S.? Well, to the excitement of the Fed, employment data, which was a serious concern during the 2008 financial crisis, is looking more and more positive month after month. As of August, the official unemployment rate fell to 5.1%, with some officials celebrating the return to ‘full unemployment’ levels . However, despite all the jubilation, productivity and actual GDP growth is still lagging way behind. Macroeconomic expert Chris Varvares estimates that “capital-equipment, software and buildings-per worker has grown just 0.3% a year so far this decade, by far the worst in at least 40 years.” Thus, real wages are also stagnant, as the yearly change rate is still hovering around 0-2% . With less cash to spend and winter months approaching, American consumers are not going to be rushing to get in line for Wal-Mart’s Black Friday sales, they’re going to be running to the banks to deposit and save. Great news for the banks, but bad news for consumption which drives the American economy. So, with the general consensus being that emerging markets will suffer greatly in the short-term at least, and that American consumer confidence and demand will slow as well, what does that mean for the average investor? Volatility. To determine volatility is to simply measure the size of changes in a security’s value over time, e.g. a higher volatility means larger fluctuations in a stock’s price in a short timespan. Volatility means different things to different people, that is, central bankers, for example, work to keep volatility at a minimum as part of their Dual Mandate to keep the prices of goods and services stable. However, speculators willing to take the risks involved can profit greatly from volatility…in the same way someone betting at the horse races can profit greatly betting on a lame horse, if you have the magic of foresight and/or are very lucky. But in all seriousness, certain investors can benefit in taking a smart position in indices which track volatility. (Source: Bank of International Settlements) (Source: Yahoo Finance) One such index tracker is the VelocityShares Daily 2x VIX Short-Term ETN (NASDAQ: TVIX ) which tracks two times the daily performance of the S&P’s 500 VIX Short-Term Futures Index. The iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA: VXX ) and the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA: UVXY ) are more bearish options with lesser expense ratios (0.89% and 0.95% v.s. TVIX’s 1.65%) and there are even more options, such as inverse VIX ETFs (which are essentially the opposite, i.e. betting on stability). Now , before you get your contrarian pitchforks out, there are some points that I will concede. I think Dan Moskowitz of Investopedia puts it best – “the only way to win playing TVIX is by having impeccable timing.” Going long TVIX is a sure-fire way to lose money as common sense dictates high volatility is not a permanent condition. Even further, on the contrarian side of things, TVIX has depreciated 99.97% since its 2010 debut, 77.92% over the past year! Clearly, it is a very risky game to play, yes (but so is the lottery and that’s a multi-billion dollar industry). However , the timing is perfect now. With all the recent domestic political turmoil across the world, emerging markets crashing, and the Fed signaling a tightening of monetary policy, I cannot see, save for a miracle from the Feds, the markets getting by unscathed without a few twists and turns. And speculators would seem to agree with this. According to the CTFC (Commodity Futures Trading Commission), as of Sept. 1st, speculators achieved an all-time record of net long VIX futures contracts, with 32,239 contracts added, double the previous record set in early February and the largest ever bet on a rise in the VIX. This is very significant; even the contrarians who would immediately disregard it and go bullish on stocks in spite have to admit that. (Source: J. Lyons Fund Management Inc.) For the average investor out there (such as myself) staying long on stocks and bonds, sticking to ETFs, or cashing out may be some of the best options available to avoid getting strung along for the ride as the markets reel and spiral. But for you aspiring speculators, hedge fund managers, or simple millionaires, this might be a very profitable time to be betting on increased volatility. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Where In The World To Look For Opportunities

While Russ believes the outlook for U.S. stocks may be muted, he sees opportunities in other parts of the world, particularly in Asia. Kisan / Shutterstock After weeks of struggling, global stocks stabilized last week. However, market volatility remains elevated. Looking at realized returns over the past month accessible via Bloomberg data, annualized volatility on the S&P 500 Index is above 30 percent, triple its early August level. Looking forward, the bumpy ride in the U.S. is likely to continue , given the persistence of several factors, including a pending interest rate hike by the Federal Reserve (Fed) and expensive U.S. stock valuations. Without the tailwind of easier money, U.S. equities will need to get by on earnings growth, of which there hasn’t been much lately, rather than monetary policy-induced multiple expansion. But while the outlook for U.S. stocks may be muted, I do see potential opportunities in other parts of the world, as I write in my new weekly commentary, “ More Volatility on U.S. Horizon Has Sights Turning to Asia .” In particular, Asian stocks, both in Japan and in emerging markets (EMs), look attractive right now relative to other regions. Two Potential Opportunities in Asia Japan Last week, Japanese stocks, as measured by the Nikkei 225 stock index, enjoyed their biggest one-day advance since 2008 . Investors were encouraged by Prime Minister Abe’s pledge to further lower the corporate tax rate. Although implementation of the so-called “third arrow” of Abe’s reforms has been mixed, Japanese corporate profitability continues to improve. The return-on-equity ( ROE ) for Toyko Stock Price Index (MUTF: TOPIX ) stocks was 8.6 percent in August, up roughly a half point from a year ago, as data accessible via Bloomberg shows. As such, investors may want to consider Japanese equities . Emerging Asia I also see potential opportunities in Asia’s emerging markets, despite my more cautious stance toward the broader emerging market asset class . Many Asian emerging markets, including the Chinese market listed in Hong Kong, have sold off in concert with China, leaving their valuations once again cheap. In addition, with most countries in emerging Asia running a current account surplus and possessing sizable foreign currency reserves , I believe emerging Asia could be better positioned to withstand a Fed tightening cycle than other emerging markets. This dynamic has been evident in the relative resilience of emerging market currencies, an important determinant of overall return for dollar-based investors. With a few notable exceptions, namely currencies in Malaysia and Indonesia, the currencies in most Asian emerging markets are holding up relatively well against the dollar, as Bloomberg data show. Even in China, despite all the hand wringing over the recent devaluation, the yuan is down less than 3 percent against the dollar this year, according to Bloomberg data. In contrast, as the data show, currencies in Russia, Columbia, Turkey and Brazil have plunged this year. Finally, many investors assume that commodities and emerging markets go hand-in-hand . In fact, most of the countries in Asia, including China and India, are large commodity importers. They benefit when commodity prices decline. This is in contrast to the situation in places like Brazil, a large exporter of raw materials. Last week Standard & Poor’s downgraded Brazil’s sovereign rating back to junk status. Admittedly, other factors—notably a major political scandal and deteriorating fiscal picture— also played a part . The bottom line: For all of the reasons mentioned above, I see pockets of value in Asia, both in Japan and in the region’s emerging markets. This post originally appeared on the BlackRock Blog

An Update On CEMIG – The Storms Are Getting Stronger

Summary Political and economic uncertainties do not aid CIG’s position and potential. The three hydro plant concessions are definitely lost and new terms could be agreed, but the cost of this is uncertain. Brazil is the world’s 8th largest economy by GDP and thus there should be a turnaround, and CIG is a great play to grasp that turnaround. The long term potential downside is getting smaller (25%) and the potential upside is getting bigger (600%). Introduction About two months ago I wrote an article about Companhia Energética de Minas Gerais (NYSE: CIG ). The stock price at the moment of writing that article was US$3.3. I assumed that the downside risk was down to US$2.24 and deferred buying in order to wait for better opportunities. At the moment the price is US$1.93 with the low of the year at US$1.81. It was a good call not to buy two months ago. In this article I want to discuss the possible effects of the new developments that happened in the last two months and see if the falling knife can fall lower or it is time to start buying in. Latest news and developments In August CIG reported Q2 results. Figure 1 shows that the net revenue increased but EBITDA and net income were down. Figure 1 CIG’s Q2 results (click to enlarge) Source: CIG’s investor relations The main issue for the decline in net income was a lower spot price and a big increase in financing costs. In figure 2 we can see the development of the interest rate set by The Central Bank of Brazil Monetary Policy Committee (COPOM). Figure 2 Interest rate – Brazil from 2005 to 2015 (click to enlarge) Source: Tradingeconomics The current set interest rate is very high with a goal of curbing the high inflation in Brazil. The high interest rate affects CIG by lowering its cash flow and net income. Figure 3 shows that the cost of debt is going up but the debt to equity ratio is stable. Figure 3 CIG’s cost of debt and leverage ratio (click to enlarge) Source. CIG’s investor relations. The increase in the cost of debt resulted in a 60% increase in interest expenses in relation to the previous 1H , from R$654 million to R$1,067 million. All these negative effects did lower the net income in Q2 but the total net income in 1H 2015 is 1.5% higher than in 1H 2014, from R$1,990 million to R$2,018 million. Unfortunately this is not of the greatest importance to international investors because if we translate the results into US currency the net result is lower by 39% in comparison to last year, from US$850 million to US$525 million. In figure 4 you can see the depreciation of the Real in relation to the US dollar. Figure 4 Brazilian Real per 1 USD (click to enlarge) Source: xe.com I believe such a chart is the nemesis for every investor because of the uncertainties that it brings with. Nobody can know how low can the Brazilian Real go in relation to the US dollar and when will it hit bottom. As a normal consequence of the falling currency and high inflation the downgrade Brazil got from Standard & Poor’s should not be a surprise to anybody. The fear and uncertainty concerning Brazil plus the junk rating the country got make it difficult for investors to assess the risks and estimate future scenarios. Apart from political and economic issues, we must not forget the legal issues related to CIG. Legal issues and news in Q3 In July Fitch downgraded CEMIG to AA- with a negative outlook and CIG definitely lost the concessions of the three hydro plants that were under dispute with the government. CIG will appeal but let us not rely on that. If the government provides CIG favorable new conditions, they will continue operating the plants but that is something we will know more about in the near future. In any case CIG will have to find ways to cover the 35% to 45% of revenues that were coming from the three hydro plants. CIG’s management is already looking for ways to grow in the future despite the loss of the concessions and one example of that is the cooperation with SunEdison (NYSE: SUNE ) and the possibility to develop solar power plants in the future. One of them is the R$ 4 billion solar plant in the state of Minas Gerais with one of the best solar radiation factors in the world. This is also an opportunity to lower the hydrological risks attached to the weather and rainfall. CIG has also shown interest in the new transmission lines that will go through the state of Minas Gerais. The company added 120,000 new customers in the first half of the year and it won a dispute with the government to prevent the adjustment of the Energy Reallocation Mechanism about the sharing of hydrological risks of hydroelectric plants. Good news is that recently the Federal Audit Court authorized the government to renew for 30 years the concessions of electricity distributors whose contracts expire between 2015 and 2017. Fundamental perspective The current book value is R$11.19 per share translates to US$2.84. With the current inflation being 11% in Brazil and the rapid depreciation of the currency, this number cannot be of any guarantee to us. A deeper look at the balance sheet shows that long term assets are R$23 billion, short term assets R$13.5 billion, while long term liabilities are R$13.5 billion and short term R$ 9.4 billion giving a good debt to assets ratio of 0.61. As a business like CIG is capital intensive and difficult to replace; thus we can assume that there is real value behind CIG’s books. As a very conservative estimation we will take 50% of the current book value to be the value under which CIG should not go, thus $1.4. Earnings for the last four quarters are at R$3,146 million, which translate to US$800 million or US$0.64 per share. If the management keeps the dividend payout policy of 25%, then it should result in a US$0.16 dividend per share. But I would not bet on that because of the deteriorating financing circumstances in the Brazilian financial markets. Two scenarios for CIG’s stock I will start with the negative scenario. The current earnings are US$0.64 where we have to deduct the effect of the loss of the three concessions that should cut about 50% of that. Higher financing costs are also an issue because the current financing costs are 50% of net income thus if they continue to increase as they increased in the last quarter, they could quickly take another 50% of earnings. In a worst-case scenario earnings could go down to US$0.16 or even go to zero for a period. The risk of lower earnings with a risky political and economic situation could bring the value of the stock even lower than the levels it is now. We cannot know how low will the market go or where will the Real stop its decline in relation to the US dollar, and the negative ratings for both Brazil and CIG are a tough storm to withstand for every investor as there might be more institutional selling along the way. Further economic pressure and depreciation could lower the price of the stock, but I do not believe it to be much because CIG is a very important business in Brazil. I will put my long-term downside risk to the conservative book value of $1.44. This makes the potential downside 25%. In the short term it could go anywhere due to panic in the emerging markets. The second scenario is a brighter one and more long term orientated. Brazil and CIG are getting cheaper and cheaper and we are talking here about the world’s 8th largest economy. The fact that it is so cheap at the moment will certainly increase foreign investments and increase exports as soon as the political situation stabilizes. Also if we look at CIG from a pure business perspective, the increase in the number of customers plus the plans for future growth through more distribution and solar shows that CIG is a good company. The future plans and possible long term turnaround in Brazil make CIG a good long term opportunity, but the investor must be willing to take 25% or more downside risk due to the deteriorating political and economic situation in Brazil. From just attaching the trailing earnings to a PE ratio of 10 we get a price of US$6.4 that gives us a 330% upside. CIG’s stable economy dividend policy is to payout 50% of earnings that would currently be US$0.34 giving a 17.5% dividend yield at current prices and 5.3% at US$6.4. If the situation in Brazil changes or stabilizes, the currency strengthens, interest rates fall and CIG shows a bit of earnings growth, we could see earnings at US$1.28 – that attached to a PE of 10 gives us a price of US$12.8. That is a potential long-term positive return of 663%. Conclusion I reiterate my standing that investing in CIG is a pure bet on Brazil and its currency. Every investor should estimate what is his best strategy in such cases. The easiest thing to say is not to catch falling knives but if you do not try the potential upside is lost. Remember to be greedy when others are fearful and be fearful when others are greedy. I will compare CIG to other opportunities and then make a decision about investing. Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CIG over the next 72 hours. (More…) 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. Additional disclosure: This article was provided for informational purposes only. Nothing contained herein should be construed as an offer, solicitation, or recommendation to buy or sell any investment or security, or to provide you with an investment strategy, mentioned herein. Nor is this intended to be relied upon as the basis for making any purchase, sale or investment decision regarding any security. Rather, this merely expresses my opinion, which is based on information obtained from sources believed to be accurate and reliable and has included references where practical and available. However, such information is presented “as is,” without warranty of any kind, whether express or implied. The author makes no representation as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use should anything be taken as a recommendation for any security, portfolio of securities, or an investment strategy that may be suitable for you.