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3/22/08

Even more on Ecuador *


How much more guff do you wanna read about an economics article? I dunno dude, but the note on Ecuador windfall tax and how it might affect the industry going forward has caught comments from a range of people. The nice people at Ecuador Mining News published it, and someone comments underneath that Ecuador could do a Russia and go for the veneer method. People mailed with either +ve-ish or -ve-ish to say. But then a complete stranger wrote this morning with a whole list of arguments against the note which included:

a) Ecuador is planning on adjusting the base rate to inflation every year and so I should STFU**
b) Ecuador hasn't decided whether to impose a windfall tax anyway and I should STFU.
c) The base reference price could be set at U$2000/oz for all we know so STFU.
d) other stuff, and concluded by saying that the note was alarmist and bad for mining investors and I should STFU (it turns out his interest in the subject is that he's long an Ecuador exposed mining company).

I would have let the subject go if it hadn't been for the irritating pedazo de that wrote this morning. Firstly, if you don't have the basic insight to recognize that the note was a piece of theoretical economics and not an investment recommendation, then you shouldn't be investing in Ecuador (or LatAm...or any stock market for that matter) in the first place. It wasn't that complicated either, written as it was for a specific audience with a briefing that was basically "don't blind 'em with science". All the points about Russia, and base prices and percentages blah blah may or may not turn out to be true, but nobody knows yet how the new rules will be set. The whole paper was meant to outline a point, not give a definitive answer.

And anyway, what gives somebody the right to send swear at and insult someone they've never met and will likely never meet? It's not the first time it's happened for sure (though strangely, when I call 'short' on a stock and the insults come, they never bother to write back when the stock slumps) and these days I don't lose sleep over it, but it makes you wonder how freakin' dumb people really are and why it's so damn easy for the unscrupulous to separate them from their money via the stock market.

Finally, the whole episode highlighted for me (for about the zillionth time) the blind spot many investors have; they just don't want to hear anything that doesn't fit into their own view about a stock. The wiser player will look at all the pros and all the cons before making a move; the sheep will read a newsletter that say "dude, buy this 'cos it's going up loads..cos look at this piece of crap math i did here...and I'm right.....honest". But once long, the same sheep spits, insults, claws and defames anyone with the audacity to tell them the truth about the stock they own. We're talking about the sheep that laugh at pennypump internet e-mail spammers but fall hook, line and sinker for a scheme only one evolutionary step above it, but we're also talking about the fund manager who takes his names off a mailing list cos they called his fav stock a sell. Highlighting the potential damage of a windfall tax to Ecuador's nascent mining industry wasn't a big thing and is an oblique in the end, but some reactions were just samo samo eejits lashing out from bruised egos cos "their" stock was "under attack". Trying to tell me that all junior miners are little angels and butter no melty in mouthy? PT Barnum knew about investors like these long before the Canadian Venture exchange existed.

However, there was one reply that was worth time and trouble. Jurgen Schuldt (a man who knows economics forwards, backwards and sideways) wrote a five page rebuttal of the simple little paper. It included gems such as;

G = P – t (P – PB) – C = (1 – t)P + tPB – C = (1-t)P + tPB - xP .

Con es evidente, las ganancias de las empresas se incrementan, cuando:

a. Aumenta P;

b. Sube PB;

c. Disminuye t;

d. Cae C (y con ello x).

and

ceteris paribus. Veamos:

DG/dP = 1 - t – x = 0,

Luego: t 1 – x, garantiza ese principio,

...and it's totally unfair to quote those out of context....but hey...my blog.

The illustrious Dr. Schuldt argues that although gold (by using the same metal as the main thrust of the original argument) may gauge costs well over the long run, the Keynesian "in the long run we're all dead" principle added to unequal short-term price movements and frictions makes it impossible to assert that gold and costs of producing gold will grow at an equal rate. The masterful Schuldt also gives much more theoretical background to the windfall vs. royalty equations and ticks me off for not showing my calculation equations. (Dear reader, if you ever want to irritate an economist, publish a set of results without showing how you got there....drives 'em mental. Thing is, in the world of equities analysis if you published your method for modelling a company's forecast results you'd be plagiarized before you can say Sarbanes-Oxley. )

Schuldt concludes that (to try and paraphrase, and risking the wrath of the great one saying "you're misquoting me AGAIN, Otto") the final decision is likely to be a political one rather than an economics one, and that's true true true. In the end, theoretical economics goes about as far as a good analysis report on a company that then bombs the day after you call 'long'. As Richard Feymann once said "It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong."

Or maybe Art Buchwald should have the last word here:
"An economist is a man who knows a hundred ways of making love but doesn't know any women."


* Cool, that rhymes and with a nice scan, too. Poetry rocks

** Shut The Hell Up

3/21/08

sneakydeaky quiztime (II)

Hey wow, it's new, its fresh, it's back by popular demand (my brother wants to play). It's.....

SNEAKYDEAKY QUIZTIME (II)

So as it's a loooooooooong weekend and by Sunday afternoon you'll be banging your head on the walls thinking of something to do that doesn't involve alcohol, here's ten (YES TEN!) questions to ponder, muse and cogitate on our beloved Latin America. Once you think you've got the right answers, send 'em in to otto.rock1(AT)gmail(DOT)com and you might be in line to win this week's ****star**** prize, A weekend in South California riding pillion through semi-desert scrub on a sword-wielding chicken's trailbike*, which is a prize well worth winning, I'm sure you agree.

So, no more flimflam, and on with the questions.

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1) Name the President who once said of Brazil, "It is not a serious country."

2) Which two South American countries publish macroeconomic statistics that can be trusted?

3) Which Latin American country's cocaine production was estimated to have risen by the greatest amount in the view of the world's most respected sector study, published this week?

4) Name the son of a famous Latin American author whose idea of promoting intellectual debate on the region is the automatic knee-jerk rejection of anything that doesn't agree with his political point of view and asking voters to spoil ballot cards rather than elect a president.

5) Which South American country is about to hold a presidential election and which candidate is currently favourite to win according to opinion polls?

6) Which Latin American country recorded the lowest official inflation rate in the 2007 period?

7) Which regional president's nickname is "squid"?

8) Which famous South American soccer player is the owner of a restaurant/nightclub that was closed in 2007 for racial discrimination when it was found it barred dark-skinned people from entering?

9) Which country is now witnessing the eighth consecutive day of industrial strike action in its most important export sector?

10) Which local currency has lost 4.65% of its value against the US Dollar since last Tuesday?

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The answers will be posted here on Wednesday 26th March, and I just know you'll be biting those fingernails down to the quick til then. Toodle pip!

*Not included in the prize: transport to South California, hotel, food, fuel for the bike, kneepads and crash helmet (and the way the chicken rides you'll need them) or the mountain of beers needed to feed the chicken in the evenings.

3/20/08

Breaking: Inca Kola News Saves Nation From Ruin

So last night we posted this thing about Ecuador. Let's do a quick check-list on wot we writ, huh?

a) Ecuador oil revenues are rocking
b) The government is seriously benefiting from the fiscal income
c) Ecuador sov bonds are a good bet.

And now, let the weirdness begin. At 3:06pm today, Moody's announced it was raising its rating on Ecuador by two notches. Bloomberg reported on the move and you can see what they wrote here, but basically Moody's said:

a) Ecuador oil revenues are rocking.
b) The government is seriously benefiting from the fiscal income.
c) Ecuador sov bonds are a good bet.

This can only mean one of three things:

1) I work for Moody's.
2) I have great timing.
3) Moody's dudes read this blog.

As the answers to 1) and 2) are "I don't", the ONLY POSSIBLE ANSWER LEFT IS NUMBER THREE*. So what could've happened at the Moody's office this morning? It must definitely have gone like something like this......like.....probably.....errrr....yeah:

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Mood dude 1: "Man, I'm bored."
Mood dude 2: "Yeah...long weekend starts tomorrow though."
Mood dude 1: "Yeah that rocks. But what can we do to get thru today?"
Mood dude 2: "Dude, I got an idea. Some dude with a blog sez Ecuador's rockin' these days."
Mood dude 1: "Cool, dude. What's the story?"
Mood dude 2: "Story's cool, dude. Ecuador's rockin' it with the oil revenues and getting serious moolah piled up."
Mood dude 1: "Hey, cool dude. The blog says that?"
Mood dude 2: "Yeah dude, and it's got some charts so we don't have to do all that reading."
Mood dude 1: "Way cool! Reading sucks dude. Hey dude, show me the blogsite......"

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And the rest, as they say, is history. I'm now waiting for Eric's studmuffin to mail me with the freedom of the city of Quito and free vino calientes for a year.

* and don't you dare write in with your so-called "logical alternatives". You're sooooo wrong, got it?



Copper, hedge fund leverage, weak hands, US kitsch movies and smart pals

Today as always copper is the lead indicator of metals, and the action is like something out of a Rocky movie.

"....I don't believe it, Mike...he's.....HE'S GETTING UP!! Yes ladies and gentlemen, even after that tremendous beating, RO-KEE-BAL-BOH-AH is getting up off the canvas and is coming back for more! Mike, have you seen anything like this?

Incredible, Bob...to see him up and punching after the beating he's just taken....my oh my...."


Three things to report:

1) The reliable word is that banks are calling in hedge funds leverage, and telling Mr. Hedgie he can only go a max of 5:1 on any commods trade instead of the general 10:1 up to now. What happens is a rush for the door as the young Gekko wannabees crap themselves, then the real players move in to clean up the mess and make easy money. You don't survive 30 years at the LME by being a dumbass.

2) More reliable word sez the metals market is 100% intact and plenty of real end-user buyers are stepping up today. Cu bottomed at U$3.51/lb, just where the bottom of my range is. As I wrote the other day;

"....Copper is not going back to U$2. Ever. Again. Amen. If it goes under U$3 for any length of time before my 4yo girl gets to university I'll be shocked'n'awed, too. Wanna know what it WILL do? Well you should really be paying me for that kind of info, but in a nutshell it'll bounce around the U$3.50 to U$4 range, breaking U$4 some time this year. It'll consolidate at or above U$4 in 2009 and then we may or may not see U$5 depending on what the dollar decides to do. No point trying to go too crystalball at this stage....."

3) While swapping e-mails with some cyberpals this morning, one of them (who runs a fund that caters mostly to non-US clients and is as smart as they come) wrote this*

"....Ever since Paulson took over in July 2006, the PM markets have had a characteristic "killer down move" pattern, which is to set off liquidation of black boxes and weak hands and allow shorts to cover at a profit. They were in big, big trouble recently, because they haven't been able to cover all the way up from $650/oz. Indeed, open interest in gold is now 100,000 contracts off its highs, which shows that there was no "excessive buying" out there but rather shorts covering in a panic. On the "killer down moves," the big commercial shorts (gold cartel) has recently been offset by commercial longs, which have stepped in to buy some of the longs puked up by the weak hands. The situation in silver is especially ripe, as the shorts have been concentrated to an extent possibly unmatched in the history of commodity futures markets.

They needed a way out fast, and to get weak longs to puke. I'm not surprised that this "killer down move" coincides with margin adjustment for hedgies. We'll see open interest contract quite a bit more after this, which is one indication of a young bull market.

PMs are a buy weakness -- sell strength market, which Western investors have a hard time with. If you buy strength and sell weakness (like virtually all hedge fund types today) you get slapped around. Easterners buy the dips. Also, you have to ignore all linear-type trend following...."

So there we have it. The moral of the story is: LET EM PANIC. Put your hand out and touch the PC screen and you can feel them running around like headless chickens right now. For what it's worth, silver at least could move down a bit more according to smart TA people, but there's no reason not to dip at least one toe in at this point, IMHO.


* I hope he doesn't mind me publishing this to a wider audience, but it's too good to be selfish about.

3/19/08

Eric's studmuffin just got lucky

"Better born lucky than rich" is a saying this Otto used to hear as a kid. It applies to Correa and Ecuador right now, cos whatever kind of mess they get into with neighbours, friends or the all-seeing-all-hearing Uncle Sam (dude, I ain't kidding...this is LatAm, not some hand-wringers ball up North where some politico hears static on his cellphone and cries Gestapo! to the New York Times), these Ecuador types who sit LITERALLY IN THE MIDDLE OF THE WORLD* are experiencing Latino paradise, aka making loads more money for doing the same thing as ever.

How? Oil. Black gold, Texas tea, there will be blood and death by 10-pin bowling. Now I'm going to show you a few charts, and all the stats come from the Ecuador Central Bank so they're all cool and legit. As usual you can click on the charts to make them bigger, and what we'll see in them is how Ecuador is going to be stinking rich this time next year.

First, the background. Ecuador runs on crude, and oil makes up around 60% all exports and is one serious chunk of total GDP. Make no mistake, Ecuador's economic fate is tied to its oil industry. If oil is good Ecuador is good, but if oil goes belly-up the caca hits the ventilador in the country, and bigtime, and fast. The production is split between private companies and the state-run PetroEcuador, and in the last 3 years production has been split like this (and while you're looking, take a wild guess as to exactly when Ecuador revoked OXY petroleum's concession, kicked them out of the country and handed to PetroEcuador).

Now Ecuador's production then slipped for a while, basically because PetroEcuador were starved of cash anyway,then suddenly got all the OXY concessions dumped in its lap with a "there you go...start pumping boyz" from the gov't. If you got no OPEX moolah, oil production drops. That's the way it is, but it didn't take long for the boringly predictable western media to start going on about how crappy socialism is cos Correa can't drill oil as fast as the guys that had been ripping the country off for years and leaving toxic messes in their wake. But once production started stepping up.......
........by sheer amazing freakin' coincidence the English speaking media decided to stop reporting about Ecuador production numbers. The moral of this is; they will never be straight with you guys up there...never. It's either bad news or STFU.

So here's where the record gets put in order.

Ecuador is now pumping at 520,000bbl/d. We know that cos it's the limit set by OPEC on the country's quota (and they'd never cheat the quota and try to pump more....oh noooooooooooo......well........only by 11,000bbl/d in December). Oil prices are rocketing. "DUH!" is the cry from the audience, but all the same you dudes have no idea how much that's going to benefit Correa's little corner of the planet. Take a look:

This is the total monthly gross revenues for crude exports that Ecuador bagged 2005-2007. They've already been reaping it in during the last 6 months of 2007. Also, the country is still exporting its crude at a good pace as this next chart shows..

...but you can see the trend line inclining slightly from just above the 68% line to just below it. This shouldn't come as a big surprise, cos Ecuador is growing GDP-wise too and will need a bit more fuel all the time to do its own internal thing.

Now that's what's been happening, but the real fun starts when we look at how things are shaping for 2008. To model this we have to do some ballparking, so here's what I'm using as my assumptions here:

1) Ecuador oil climbs to U$100/BBL average by December 2008. It sold at an average of U$77.2 in December 2007. I've made the curve sharp at the beginning of the year to match what we've seen in the spot market so far, then it climbs gradually to the $100 mark.

2) The percentage of exports to total production drops by 0.1% per month. That means December 2008 is at 65.9%. I'm trying to reflect in a simple way the internal growth and the demands it will place on crude production, that's all.

3) Production remains steady at 520,000bbl/d all year, and costs rise in proportion to the rise in oil price. No need to go in for all that 'growth' stuff you guys up there love so much.

And that chart totally, but totally rocks. The last round of "Correa's toast cos oil is crapping out" headlines from the bizwires came around the August/September time when oil exports were grossing around U$700m per month. We're now looking at a U$1000m per month scenario.

But wait...it gets better. Correa&Co want to raise the windfall tax on private oil companies to 70%. If we assume this hike happens in June 2008, this is what our model says will happen to the money Ecuador gets from crude, and that's PetroEcuador and the private companies minus their own profits.
Holy Fiscal Bonanzas Batman, it looks like oil loot nearly triples in just two years!

Believe me, that's a lotta cash for a little country like Ecuador, with 13.8 million people and a GDP of U$44.5Bn approx in 2007. In fact, under this forecast 12 month revenue growth would add up to 8.8% of 2007 GDP.....that's serious, serious money. And remember Ecuador doesn't have to do anything special here, all it needs to do is keep churning out the oil at today's rate. This is not grand planning coming to fruition, and it's not Nobel-Prize-for-Economics complicated. They just....got ...lucky.

On the other hand the gov't does have the choice on how it spends the bonanza about to fall in its lap, and if Correa is as good as his social-ticket word, the lot of the average Ecuadorian on the street is about to take a turn for the better. Which is great news for the locals, but what can we guys do to get a piece of the action? Easy, you listen to Otto's reco right now to buy Ecuador sovereign bonds. Ecuador is on a 773 basis point spread on the EMBI+ index tonight, which means they're going to give you at least 10% interest on your cash. And the cool kicker is that because you get in now while the world is snoozing, come the end of the year you'll be grabbing the decent interest rate and you'll be holding a bond that's worth more in itself. But whatever happens, don't worry about Ecuador not having the cash to service its debt, cos there's as much chance of Ecuador defaulting this year as there is the hole in my butt healing up.


*That one's for you, Shynade

phonecall with an investor today and then a rant into empty cyberspace you can ignore without missing much


Man in photo, "Looks like you were wrong, Otto."
Otto, "Why you say dat, dude?"
Man in photo, "Gold's down."
Otto, "Yeah, I had noticed. Why you say I'm wrong, though?"
Man in photo, "You said it'd go up."
Otto, "Over what timescale, fruitfly brain?"
Man in photo, "Not the point! I lost 3.7% today, dumbass!"
Otto, "On what?"
Man in photo, "On your reco of $1000 gold!"
Otto, "So you bought gold at $1000?"
Man in photo, "Well, no. I'm holding gold...but I could've sold it at $1000....or more!"
Otto, "I see. And at what price did you buy gold?
Man in photo, "$550."
Otto, "Good price! Who got you in that low?"
Man in photo, "Well.....errrrrr......you, actually."
Otto, "Thinking of selling?"
Man in photo, "I dunno. What do you think, Otto?"
Otto, "I think you should pay me more and I think you should take this opportunity to add to more GLD. The next sound you'll hear is 'CLICK! brrrrrrrrrrrrrrrrrrrrrrrr'."

Now I might have exaggerated a bit, but not that much either.

What do phrases like "long term investment", "portfolio core" or "preservation of capital" mean to you, dear reader? Cos it seems to me that people brought up on MTV think anything on youtube over 3 minutes is 'too long', anything that doesn't make money in 10 minutes is a 'wasted trade' and any stock, bond or commodity that moves more than 1% against a bought position must be 'bailed'.

The cult of 'instant', the cult of fame, the cult of personality. Look at Jim Cramer for example. Now I'm not going to knock the guy for what he does, cos his show is great fun and his deep knowledge of the market is clear to see. His calls suck sometimes, but hey!...so do everyone's...so do mine (hey lash?). You can't win 'em all, and from long experience I know what I am good at calling and what I suck at. I'm good at seeing long term trends, cheap valuations and underreated companies that, given time, will perform and hit targets. I suck at short term trading, and d'ya know what? That why i don't do it! TA-freakin'-tah!

But back to Jim. My gripe is the Cramer wannabees, all trying and miserably failing to grab on to his coattails. A pal sent me a youtube link of some guy slagging Jim off over his BSC call yesterday; it was unwatchable. Some 25 year old "yep, i know the markets" face with "an attitude" that can be "controversial". Just another asshole destined for an object lesson in how the world works through his wallet, if you ask me. And he may not even learn when skinned of everything and just wade in and do the same stupid stuff again and again.

One of my favourite sayings comes from Nansen, an 8th Century Zen master, who said, "Before enlightenment chop wood carry water. After enlightenment chop wood carry water."

That totally rocks, and Otto's best reco for tonight is "light dat incense, hit dat lotus, and dedicate a few neurons to dat ditty, dude."

Here endeth the rant.

sneakydeaky quiztime: the answers

Yes, indeedy, it's that moment all three of you have been waiting for (frankly, I'm amazed that three people bothered to write in, but there ya go)...yes...(roll of drums)...YES...(cymbals doing that crescendo thing)...YES...(trumpet peal), it's


THE ANSWERS TO THE SNEAKYDEAKY QUIZ!

As long as your alzheimer's hasn't gotten worse since the weekend, you'll remember that i posted up five charts showing annual inflation 2001-2007 for five different LatAm countries. Your job was to tell me which country was which chart. So no more blabbing, here we go with the answers:

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Chart 1 was Argentina
....probably the easiest one of the lot, with the 40% spike in 2002 caused by Morgan Stanley and JP Morgan placing massive short orders on Argentine bonds via European markets and crashing the Peso in late 2001.......OH MY, DID I JUST SAY THAT? ...cough cough...errrrrmm...moving swiftly on, let's have a look at answer number 2:


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Chart 2 was Peru
Only one of the three who wrote in got it right. This year's 3.93% isn't really true though, is it? The 3.93% is a) a lie and b) only for the Lima metropolitan area. If you add in the other 67% of the population the real rate is 4.9%...but don't tell Bloomberg, will you?

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So on to chart three. This chart was Chile
Yes, good ol' Chile, land of copper, copper, copper...a bit more copper, fish meal, good wines and the worst city transport system in South America (and that really is an achievement). The 2007 hike made it fairly easy, I thought.

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Ok now round four, and nobody got this one, 'fraid to say. The chart was Costa Rica
Yeah I know...it was a toughie. Why do you think I called it a sneakdeaky quiz, anyway? Costa Rica may have a cool line in Salsa music, but their inflation rate sucks.

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And the last one. This chart was Brazil
I was kinda surprised nobody got this one, after all the drop drop drop in SELIC rates has been one of the better success stories in LatAm economics these last few years.

So there you have it, all wrapped up for this quiz. And as for winners, the best score was 3/5, and that's just not good enough I'm afraid (initials GR), so there's no prizes, no snogging with Su and no free beers this time. Tough. It's my blog and I'll change the rules if I want.

3/18/08

Doing it Doggystyle in Sao Paolo (or "Revenge of the Failed Moneymen")

Just to prove we care about the real serious, deep economic issues, today we report on the big, bad heavy duty economics forum that kicked some serious butt in Brazil today. "The Euro: Global Implications and Relevance for Latin America" was the name of the bunfest and the TMF* sent along its esteemed economist and Director of the Western Hemisphere Department, Anoop Singh to address the assembled dignitaries.

Anoop addressing today's audience
(or did I make a typo at Google Images?)


Now since getting kicked out of Latin America by countries that;

1) got screwed by following its policies to the letter...
2) decided to ignore their advice, turned themselves around and got rich...
3) paid off what they owed to the TMF* and told them to go to the shell of your parrot**...

...the TMF* has been reduced in the region to oblique crits and catty comments. Today was no exception, and it didn't take long for your diligent incakola crew to spot the attempted bitchslap in Anoop's presentation today (available for your viewing pleasure right here).

Check for yourself Fig. 18 of the presentation (on page 14), entitled "Change In Trade Balances, Assuming a Drop of 35% In Commodities Prices" (snappy title, huh?). In this table, we get the TMF's* call on what will happen to 17 LatAm countries if the bottom falls out of the commods market and they all drop 35%. Now before we go any further remember this is just another round of BS scaremongering, but let's hear these guys out, yeah?

The whole calculation is on how trade balances would be affected. Y'see, cos we got loads of commodities down here most countries are running a trade balance surplus right now (eg Latinland sells U$20Bn of commods and buys U$15Bn of DVD players, final score U$5Bn to Latinland). This is good of course, and long may it continue. But the TMF* says that if commodities drop in value the problems will be worse in some countries and better in others.

So let's look at five states they mentioned and examine the results. You'll see for each country

1) the GDP figure for 2007
2) the trade balance for the country
3) the trade balance as a percentage of GDP
4) the TMF* forecast on how a 35% drop in commodities prices would affect the trade balance as a percentage of GDP
5) Anoop's final verdict (ok we made this bit up, but we're kinda sure he was thinking these thoughts all along....like....probably....dude)

All the GDP and trade figures are from the 2008 CIA World Factbook, by the way. (those CIA guys are useful sometimes).

Argentina
1) GDP: 523.7Bn
2) Trade balance: 14.34Bn
3) % of balance to GDP: +2.7%
4) TMF* 35% adjustment: -3.8%
5) Anoop's final verdict: "You guys are screwed. We hate you for ignoring us and being successful. You better pray China keeps buying your mouldy soybeans, Kirchner."

Brazil
1) GDP: 1838Bn
2) Trade balance: 46.4Bn
3) % of balance to GDP: +2.4%
4) TMF* 35% adjustment: -1.1%
5) Anoop's final verdict: "You guys scrape through, cos even though you kicked us out you did it diplomatically and as I'm standing here in Sao Paolo it'd be a bit bogus to slag you off."

Chile
1) GDP: 234.4Bn
2) Trade balance: 24.63Bn
3) % of balance to GDP: +10.5%
4) TMF* 35% adjustment: -6.3%
5) Anoop's final verdict: "Everybody loves Chile, so there's no freakin' way I'm going to point out the obvious fact that you guys are so damned dependent on copper it hurts. We love you guys. Air kisses to Bachelet."

Peru
1) GDP: 217.5Bn
2: Trade balance: 8.39Bn
3) % of balance to GDP: +3.8%
4) TMF* 35% adjustment: -4.8%
5) Anoop's final verdict: "Hah! You think you're getting investment grade this year? Wrong again, fools! Get yourself some value added on those metals you mine and we'll talk again, suckers."

Venezuela
1) GDP: 335Bn
2) Trade balance: 21.56Bn
3) % of balance to GDP: +6.4%
4) TMF* 35% adjustment: -9.2%
5) Anoop's final verdict: "Did you honestly think we'd say anything vaguely complimentary about your sustained growth, improved living standards, success in fighting poverty, high currency reserve levels and everything else we just ignore cos you're doing well?"

You see, the international economics community is just as snarky as the political community that grabs all the headlines. You just need to look a bit closer to find the snarkiness.


* Turkey Monetary Fund, cos it's the only country left that wants to borrow from them

** knowledge of Argentine slang necessary

PCU and the kind of technical analysis I like

So above we have a kitco chart of spot copper for the last 5 years, and below we have a bigcharts view of Southern Copper (PCU) for the last 5 years. Err...that's it, really.

Gary from biiwii and others know I don't care much for technical analysis, but it's madness to ignore the kind of relationship shown above, simple as it might be. I've been bullish on PCU since it was around U$23 (split adjusted), and so far it's been one helluva trade. I even went neutral on PCU when it got to U$125, and although it blew out above that a few days later the call was fair (never called it a a sell or a short, though). Right now? Buy it.

Right now fear'n'greed debates on whether miners will continue upwards, whether China commodities demand will slow, whether this that or the other. Most of it is pure noise and comes from people with the analytical capabilities of fruit flies. PCU and other large copper producers are licences to print money, and my totally correct and unbeatable views on copper going forward are already on record. Modest, huh?

So today's market reco?

1. Buy PCU right here right now
2. Take a very long fishing trip, and unless you're a finance professional or you want to foster your own neuroses don't listen to the incessant market chatter.
3. That's all. Have a nice day.

3/17/08

Peru's average salary is now "One.....Million....Dollars"


"We don't have the time for psychological romance"
(Cameo, Word Up!, 1986)

A lot of BS being thrown around in Peru economy circles these last few days. In the red corner, we have headlines about chicken and tomatoes up 25% in a week, a CPI number up 1% in February and national inflation spiralling to an official 5.98% YoY with most of the population laughing a tragic laugh about that one (cos it's way higher, and there ain't no doubt, dude).

In the blue corner we have the finance minister telling us inflation is under control, the stats office telling us that January growth came in at over 10%, the gov't Markets fat controller saying it was all the retailers' fault and the incredibly unlikeable cabinet chief telling us that Peru's inflation was 4%.

Far too many hyperlinks there, but it does give an idea of the amount of debate going on right now in Peru about inflation, growth and all that malarkey. So it's time to sift through the crap, stop taking sides and get real. Some basic points and my take on each one coming up:

1) CPI climbed 1% in February, yep. The gov't claims it was due to the landslides and the protests that cut supply lines to Lima. Otto Sez: I'll believe them this time, but any more of those 0.5% monthly inflation numbers and Carranza's inflation targeting will belong in Franz Kafka's world, not mine. On the downside, this gov't is getting real paranoid about inflation and unions are calling for national strikes to protest the price rises.

2) PPI is running at 7.59% per annum, and that's a sharp increase. Food&bev inflation is at 7.8% per annum, which beats the overall number easily. There is some evidence of retailers hiking prices on a few food products (the gov't highlighted garlic, of all things). Otto Sez: yeah right, Alan and co. will blame Hugo Chávez for the price of Broccoli next. These people trying to tell me that construction materials go up 9.46% in a month and the guy contracting the builder won't have to pay extra? Gimme a break, guys...things are more expensive. Admit it.

3) Growth looks solid and strong. The motor is construction, with many an anecdotal tale going around about how land prices are shooting up, labour shortages in the building world etc. Otto sez: Ok, let's take that 10.06% January growth figure as gospel, and it does tie in with other numbers coming out right now such as non-skilled and black market labour wage increases, cement dispatches etc.

All well and good, but how does it all add up? Here we go with le chart du jour, which compares Peru's GDP growth, its salary growth and its official inflation rate. Now this chart does need a little explaining to get it into context so bear with me.

Firstly, all the stats used are official gov't numbers from either the INEI or the economy ministry (pretty promise). So to explain, I've taken 2003 as the base point for the three sets of numbers, and indexed the year at 1000. Then in the four years that follow the percentage differences are compounded to the starting point. For 2007, I've used the very latest figures that drag into 2008 a bit, with February being the cut off for all three numbers. Unfortunately, the national salary figures are way out of date so I've gone for the Lima+metro number.

So what's the upshot here? Well GDP growth of 25% in four years, that's what's happening. That rocks, but there's no doubt that metals prices have been leading the charge and a lot of the money made isn't seen by José Publico. That's clear just by looking at the gap between GDP and salary growth. But the latest set of numbers look encouraging for a gov't pinning all hopes on a trickledown model; for the first time in all that time salaries are outstripping inflation, even though inflation rates have been catching the headlines. That's good, as long as the stats are reliable. I've got to say I have my doubts and the methodology used to take the salaries survey is a bit shaky, but there's no way I'm dismissing the salary numbers as false. It's called "benefit of the doubt".

The bottom line here is that things may finally....finally...FINALLY be getting better for the average Peruvian (at least in Lima), even with inflation numbers that grab headlines and are manipulated by pro and anti gov't factions. But if things are getting better, why is Alan García's approval rating running at 28% and his admin at 25%? Perhaps because Alan's mini-me believes social programs should only go to those parts of the country that voted for García in the last elections? Nah, surely not.......

Argentina's rust belt

If you're a regular traveller through the pampas of Argentina, you might have noticed a landscape change in the last few years. The humble soybean is the hottest agro product out there right now, and views such as the photo above (it doesn't really do justice to the huge tracts of land* we're talking here, but it's a start) are common.

Here's a chart from the USDA that gives a couple of stats about the change. 2007 isn't included here, but last year beat the 2006 record, with 48MT of soybean harvested. Soya is wildly profitable for large-scale farming techniques and many landowners are turning their backs on the traditional cattle/beef farming that goes back to Martin Fierro times to plant the bean.
Soy is now the biggest single contributor to Argentina state coffers. Last week, the tax on soybeans was raised to 44.1% of export revenues from 35%, a percentage that was raised from 27.5% last year. The tax on soymeal was pegged at 3% below the bean, but due to an ongoing protest now 5 days old, the government today decided to make that break 4%. The way things are, at today's prices that means the argentine gov't gets about U$515 per tonne of soystuff exported, and as 95% of the crop is exported, we're talking big money here**.

It seems too good to be true, right? Right. Despite nearly all the soybeans in Argentina being "RoundupReady", which means Monsanto sells you the genetically modified high yield bean that's resistant to its own pesticide (what's known in Argy as a "negocio redondo"), this year cases of "Asian soybean rust" have been reported. If you can't be bothered to click on that last link, basically the nasty disease isn't new to Argentina, but it is the first time that its shown itself early in the growing season and the expert says that the problem is growing. To give a bit of context, last year Brazil lost 4.5MT of production 'cos of soybean rust (call it 4% of total production).

Not so bad, you might think. And sure, up to now correct use of fungicides has protected the precious crop. But pachamama has this tendency to get round our clever scientist bods with mutations and Darwin and stuff, and the monoculture crop nature of today's Argentina that basically plants one single variety of one single bean in 50% of its cultivated area (and if you know the pampas, you'll know we're talking bigsky world) is just asking for trouble if you ask me.

But hey, don't ask me....take a trip to Boston, Mass. some time. When you do, find a friendly-looking cop with an orange tinge to his hair and ask him why his great great grandfather moved to the USA.



* copyright, Monty Python and the Holy Grail, all rights ignored

** my casio sez for 45MT harvested in FY08 and 95% of that exported, we can ballpark U$22Bn for Cristina and company. That's about ArgP$2,300 for every man, woman and child in Argentina. Not shabby.

3/16/08

Watching something interesting on your screen tonight?


I'm watching this, and it beats the crap outta that limey Simon wassisname.

sneakydeaky quiztime

Soooo...think you know your LatAm? Well here's today's sneakydeaky quiz that's sure to test your brain, attention span and boredom limit.

Pretty simple, really. Below we have five charts showing the annual recorded inflation rates of five different Latin American countries, and all you have to do is work out which country is which chart. As a couple of hints, pay attention to the LH scale and also remember this does not show the smooth transition of a YoY monthly annualized chart...this is the straight plain vanilla final score inflation recorded by the country in question's central bank in every given year (yep, they be all official numbers...i looked 'em up and that). Oh, and click on the charts to make them bigger....it might help.

If you think you know all five, send your answers to my mail address; otto.rock1 (AT) gmail (DOT) com. First prize is a night out with Susana Giménez*. Second prize is two nights out with Susana Giménez**. And if you're too chicken to write in, I'll be posting up the right answers Wednesday 19th March. Toodle pip!






* or I'll get the beers in when we meet
** or I'll get a beer in when we meet