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Peruvian babushkas and investment grades

The Babushka effect. This term was coined by a smart guy I know in New York, and refers to the amount of dollars stashed away in cubby holes, under mattresses, in shoe boxes etc etc. The name comes from the fact that Russia is one of the greatest depositories of physical dollar bills, but very few get left inside the four walls of banks. The babushkas (grandmothers) have them.

This is also true of LatAm, of course, as people's savings here are often both in dollars and hidden from the financial system. So what with the sudden rise in the Nuevo Sol (PEN) dollars stashed in Peru are coming out of hiding, and I've even got some anecdotal evidence to back that up. I'm told by those in the profession that money exchange houses are handling more and more old style dollar bills, and I'm also reliably told (reliably, else I wouldn't be passing it on here) that people who regularly change U$200 or U$300 a month have been changing four or five grand at a time*.

This also ties in with a report in Peru's El Comercio yesterday, which was bemoaning the low level of savings registered in Peru compared with other countries.

This looks pretty woeful at first sight, but this doesn't mean there aren't many people saving money in Peru (a point missed by the article). It means there aren't many people formally saving in Peru...a BIG difference, Señora Babushka.

Now, how does this tie in with investment grade? Well, according to the English version of the Peru gov't website on the matter (which needs to be updated, Alan..get to it man!), Fitch, S&P and Moody's all had one comment in common when referring to Peru's institutional weaknesses (i.e the thing holding the country back from getting a better credit rating).

Fitch sez: "High dollarization level albeit decreasing"
Moody's sez: "High foreign debt ratios.....High debt rate in foreign currency.....Presence of a highly dollarized banking system"
S&P sez: "Foreign vulnerability, although decreasing, due to high dollarization and foreign public debt."

If you spotted the concept of "dollar" as being in common there, you spotted the same thing as me. But what with the dollar tumbling against the PEN recently, the benefit has been to squeeze out the dollars from the system, both the formal and the informal ones, and get people to convert to PENs for more transactions. According to latest govt' figures, the "dollarization of the economy" (whatever that really means, but I'm pretty sure you're with me) has fallen from 60% to 40%. Meanwhile, the hidden savings dollars have come out from under those mattresses and added to the downward pressure on the greenback.
Now, how much of this downward pressure is external (from banks recommending buying the PEN and local bonds) and how much is internal is up for debate. I would, however, propose that blaming it all on hot money (typical reaction from indignant local economists) entering the country is not the whole story. There is also a lot of cold money leaving the country (in the form of saved dollar bills) that creates internal demand for the PEN.

This has played into the govt's hands on the quest for investment grade. The rise in the Sol vs the dollar has certainly helped the partial de-dollarization of the local economy. And the more the PEN gets love, the more loveable it is, so the more love it gets etc etc virtuous circle style*. The central bank has intervened on the way down, but has done so to make the drop as orderly as possible and has at no point used an agressive intervention policy such as in Argentina. It comes as little surprise, therefore, to note that the gov't has basically ignored the squeals of pain from the non-commodity export community about profits draining away.

The population that has lost purchasing power by saving in dollars has not been so vociferous, (perhaps because they don't quite understand what has happened as yet) but there are plenty of grumbles going around about how ordinary people's savings have been reduced by the PEN appreciation. All in the name of making the country wealthier, ya knowz.........

Semi OT (but only semi): The economist Franklin Fisher once said (and forgive me if I don't get the quote dead on...this is from memory), "It's difficult to be an expert in a discipline that everybody understands. It must be even more difficult to be an expert in a discipline that everybody thinks they understand. This is why I don't envy football managers, because being an economist is similar."

That ditty that has stayed with me over the years, cos it reminds me that I'm not an economist. This is also why equities analysts enter the ring with economists at their own peril, cos those dudes can scrunch your pet theory up into a little ball in about 14 seconds flat, and ladle the science on in such a way that comebacks just get them guffawing at your naivete. Bless 'em all. Just beats me how they can all have such different views and all be so totally correct at the same time.

* It cost me three beers to get that an Ad for me, will you?
** I will bow to correction, but I believe the term "virtuous circle" was coined by the spiritual guru "Osho" in the 1970s...economics stole it from metaphysics, it seems

sneakydeaky quiztime (IV)

Be very afraid.....its...


...and after the rousing success of last week with eight (YES EIGHT!) contestants, the scene is set for this week's battle. We're going for the multiple guess...OOPS...the multiple choice format again, but this week we're going for a kinda newsquizzy thing all about recent local developments.

And what's up for grabs this week? Ooooh dude, you gonna be scramblin' for this week's star prize, cos the winner gets to be ONE OF THE OFFICIAL NEUTRAL OBSERVERS OF PARAGUAY'S PRESIDENTIAL ELECTIONS*. You'll be based in Ciudad del Este, known for its proximity to the Itaipú dam, the Iguazu falls, the Chinese Mafia dudes, yellow fever, dengue, malaria and SUVs with chassis numbers filed off. If there's no outright Prezzy winner on April 20th (very likely) you'll be required to hang around for a further three weeks in 110º heat and 120% humidity for the run-off vote, but the tereré is on the house.

So on with the show, and here come the all-impotent** questions. Bon chance mes braves!

1) Peru was awarded investment grade this week, but which ratings agency gave them the prize?

a) Standard & Poors
b) Fitch
c) Moody's
d) Nielsen

2) This week, Iran offered U$230m to build a new hydroelectric dam in the region. In which country?

a) Honduras
b) Venezuela
c) Bolivia
d) Nicaragua

3) This week, scientific tests report that Botox may be a health danger, as if injected in the face the toxins may move to the brain. Which Latin American president is the most at risk from this news?

a) Michelle Bachelet
b) Rafael Correa
c) Cristina Fernandez de Kirchner
d) Manuel Noriega

4) Which of the following countries had the lowest rate of inflation for the month of March?

a) Chile
b) Peru
c) Brazil
d) Colombia

5) In 2007, Mexico's oil production stood at 2.94Mbbl/d. What is the projected production for the year 2021, according to the Mexican gov't?

a) 2.6Mbbl/d
b) 2.2Mbbl/d
c) 1.8Mbbl/d
d) 1.4Mbbl/d

6) Due to the agro strike, to which country did Cristina Kirchner cancel her state visit this week?

a) The UK
b) The USA
c) France
d) Brazil

7) Colombia revealed that it has paid an informant for revealing the exact location of the now bombed out FARC Ecuador camp. How much was the reward payment?

a) U$1m
b) U$1.8m
c) U$2m
d) U$2.7m

8) According to this week's gov't figures, what percentage of GDP is Argentina's foreign debt?

a) 67%
b) 20%
c) 42%
d) 49%

9) According to the latest approval ratings which of these four presidents is most popular with their own citizens?

a) Evo Morales
b) Michelle Bachelet
c) Lula da Silva
d) Alan Garcia

10) According to a report recently published by the Cuban gov't, what is the annual consumer inflation rate in the country?

a) 4%
b) 6.5%
c) 7%
d) 11%


So there's this week's quiz. Be sure to write in to otto.rock1(AT)gmail(DOT)com with your answers, cos that first prize is a real mouthwaterer, eh? The answers will be published here on Wednesday 9th April.

Toodle pip!

* not included in prize, travel to Paraguay, accommodation, price of the several nasty vaccinations you're going to need, time off to recover from vaccinations.

**not a spelling mistake


understanding the stock market: lesson III

A man walks into a brokerage, and after being greeted by the manager says,

"Well, I have half a million dollars to invest and I'm looking for advice."

The broker says, "That's a good amount, Sir, but all the same I need to ask you a couple of screening questions before we go any further.

"Sure, go ahead."

So the broker asks, "A horse, a cow, and a deer all eat the same stuff, grass. Yet a deer excretes little pellets, while a cow turns out a flat patty, and a horse produces clumps of dried grass. Why do you suppose that is?"

The man replies, "Hmmm...I have no idea, I'm afraid."

To which the broker says, "Well, seeing that you don't know shit, I have the perfect portfolio set-up to offer you, Sir."

snippets and

From the department of "told ya so"

Ecuador bonds on a total roll, and now the yield just dropped to under that of Venezuela's. This according to Bloomberg, but of course it depends on which bonds you're looking at and what kind of political point you want to get across. Great how any regional success story is used to gratuitously stick the boot into Chávez, innit?

From the department of "dropping subtle hints"
The bossdude at Argentina's Central Bank writes a civilized letter to The Economist to say its recent analysis totally sucked (and errr....he's right). But at the same time he drops a (oh my stars I hope this is true) big hint about the BCRA's forex policy and that "...we do not have a commitment to any particular exchange-rate level..". Is this a signal from the upper echelons that the obviously long term commitment 3.15 to the greenback is on the way out?

From the department of "treating people like adults"
Luis Carranza please note; the President of his role model state admits inflation is a "huge problem". Even in this post neoliberal liar's poker world, it still pays to be honest sometimes, ya knows.

quick comments on stocks held

GLD: Wheeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!!!

PCU: I've just lightened a bit. This isn't cos of anything in the company, it's just that copper has reached my U$4 channel ceiling and if it behaves as I think it will, we'll get a sell-off of spot, followed by the bears growling and sheep selling PCU back down to 105. We shall see if this works next week.

FVI.v: this isn't one I've mentioned here as yet, but I like it so so very very much long long amen. It's fighting back today and I'm pleased about that. More coming on this little beauty, scout's honour.

Watch out for the sneakydeaky quiz mañana, dudes. Have a good weekend.


Luis Carranza: Arthur Burns redux

The Refutation of Bishop Berkeley

After we came out of the church, we stood talking for some time together of Bishop Berkeley's ingenious sophistry to prove the nonexistence of matter, and that every thing in the universe is merely ideal. I observed, that though we are satisfied his doctrine is not true, it is impossible to refute it. I never shall forget the alacrity with which Johnson answered, striking his foot with mighty force against a large stone, till he rebounded from it -- "I refute it thus."

I warned you.
Don't say I didn't warn you.

There has been two disparate pieces of Peru economy news in the last 48 hours, namely the nasty inflation rise and the Fitch ratings hike to investment grade. I've actually put a couple of rockingly cool charts together on the investment grade theme, but this post will be about inflation and we can save the fruits of Excel for later.

Carranza gave an interview to the highly professional, intelligent, clean-living, handsome, sexy-yet-totally-masculine and witty reporters who work at Reuters Lima on Thursday. Glad to say the triumphalist "we're on the road to first world" that was part of his comments of Wednesday were not part of the interview, but the Carranza dude is still pretty keen on what he sees in Peru's economic future, that's for sure.

Bloody frightening, if you ask me. His comments on inflation included such gems as, "We want to make sure that domestic demand doesn't grow excessively and that inflation expectations stay in check."

Errrrr....say that again? STAY in check? Now this is the country that, just a few months ago, lowered its inflation target to 2%, plus or minus 1% (meaning a ceiling of 3%) for FY08. What did that mean? That meant there was AN INFLATION EXPECTATION of 2% for the whole of 2008. Here we are, just three months gone, and annual accrued inflation is already over 2%. And now Carranza is saying to us that he was expecting this, and if it changes from now it might be a cause for concern? Gimme a break!

Unfortunately it wasn't just a one-off slip of the tongue, cos later in the same note he is reported to say, "If we observe inflationary factors and expectations change or cause contagion of food prices, we will react with a bigger fiscal restriction"

If? IF?? IF!!!! Oh my stars! 0.91% in February (blamed mainly on imported inflation) and then 1.04% in March (but honestly, it won't happen again and this time I really mean and he says IF we observe inflationary factors!! The brass neck of the guy is impressive. Well IF you want to observe a bit of inflation, go down the market and buy some chicken, or some eggs (gone from 20 centimos an egg to 30c in a matter of weeks), or tomatoes, or rice (jeez...the price of that!! Next they'll be saying that Peru imports rice and it isn't anything to do with us) or a whole host of things that really matter to the dude on the street (and screw your beer, Alan).

We've heard that "next month will be different" from Peru's finance dude every month since December, and apart from January it's has just got worse every month. You'll also note he says that if necessary, he'll tighten the fiscal surplus to above the current 2% projected mark. Well that's total BS too, and he was blown completely out of the water by Bruno Seminario in an excellent interview published today who pointed out the surplus must be running at 5% already, so any hypothetical tightening from 2% to 5% will just be pushing on a rope.

Back in the early 1970's in the USofA, Arthur Burns made the same mistake that Carranza is making right here right now. The then Fed chairman dismissed the outbreak of inflation as "merely imported" and said it would pass quickly. He ploughed on with his own policy, disregarded what was happening in the real world, and as a result US inflation shot to 12%+. This Carranza dude needs to get down from his "I'm right I'm right I know I'm right" pedestal and learn a bit of economics history before he screws up the country (and learn a bit of humility while he's at it). Simple question: If it's imported inflation, why is rice up? I know the answer, and i'm darned sure Carranza knows the economic theory behind it why is he ignoring facts?

In this minister's cloud cuckoo-land, inflation is still a hypothetical problem. Ridiculous. It really makes me want to grab him by the scruff of the neck, take him shopping, point to the price tags and say, "I refute it thus...and thus....and thus....and thus........."

Argentina's Merval index : an overview

I meant to do this note over last weekend, but time and stuff happened. But here we are, and the idea is to look at the new weighting of the Argentina Merval index that was announced late last week, and use the news to talk a little about some of the companies listed there.
The chart shows the company ticker and what % of the index it represents. The first thing to note about the Argentina headline index is that it isn't very Argentinian. Italian steel/seamless tube maker Tenaris (TS) is the top weighted company of 18.37%, then the two variations of Brazilian Petrobras (APBR) and (PBE) make up another 15.41%. Add in the other foreign owned companies on what's supposed to be "the Argentina index", and you find that 44.26% of the list is not Argentine! And even then I'm being generous by not including TECO (see below)

The other big block is banks. With five separate banks that make up another 17.94% of the index ((BMA) Banco Macro, (GGAL) Grupo Galicia, (BPAT) Banco Patagonia, (FRAN) Banco Frances, (BHIP) Banco Hipotecario), the actual chances of finding a bit of Argentina's industrial base gets even slimmer. Add em up, and 62.2% of the Merval is either a foreigner or a bank, which goes a long, long way to explaining why it is that the Merval trades in virtual lock-step with world markets. This is shown on the following chart that compares the Merval, the Dow and Brazil's Bovespa index....guess which play did you better for the LatAm boom?

As for truly Argentine plays, number one on the list is Pampa Holdings (PAMP), a holding company created a couple of years back by some smart guy who saw a gap. Basically he took a dilapidated meat packer named Pampa and stuffed it full of power generation assets, then floated the new vehicle and raised more capital on it with which to buy a few more energy plays. Not a bad idea, but up to its ears in debt and dependent on continued growth for survival. Management has also shown the tendency to dilute the share base heavily in order to raise money (a trick the bossman picked up from his time at the untouchable IRSA (IRSA) and Cresud (CRES) (CRESY), no doubt), so caveat emptor is the phrase for those considering a long term position in PAMP. However it's a good trading vehicle, with pretty strong moves both ways and plenty of call options available.

Aside from Banco Macro, the next two higher weighted plays that can be called Argentine are TECO and MOLI. Telecom Argentina (TECO) is in fact majority controlled by Telecom Italia, but it's fair to call them Argentine. It's also fair to call them a rocking buy right now, as they have growth, market share and earnings all on their side. It's cheap as chips right now and is my number one favourite Argentina pick, the cool kicker being it's also available as an ADR in the US markets, ticker TEO.

Food business Molinos Rio de la Plata (MOLI) is majority owned by the Perez Companc family, who made their money in the oil business. MOLI is a good company and has enjoyed a good run recently mainly thanks to the agro boom/agflation, but it's fairly priced right now and doesn't offer much value, methinks.

Further down the list we have a mixed bunch, but a few companies stand out right now. First is Grupo Clarin (GCLA) Argentina's biggest media business and owners of newspapers, cable TV distributors and internet service providers amongst other things. GCLA has recently floated part of the company in the London and Argentina bourses, and has only just made it to the headline Merval list this month. An interesting company and one for the long-term holder to consider.

The next worth mentioning is Ledesma (LEDE), a sugar processor that is expanding its ethanol production branch. Strong balance sheet, and very little debt on board makes it a play on LatAm agro that will ride out any financial storm.

The last one I like on the list is Mirgor (MIRG), a company i mentioned in a previous post here recently. Very good company, and looking to expand production in FY08 to meet heavy local auto parts demand.

Thus ends our little review. There's a ton more to say on this subject, of course, if any of you have any specific questions on any Argentina stock I'd be happy to get your mails*. Another place to get info on these is the Argentina stock market website, which has an English version too. Chau for now

UPDATE: A reader has written to ask if I can do the same kind of overview for the Peru stock market...sure, no problem. Look out for that one soon.

*Send to otto.rock1 (AT) gmail (DOT) com.


Chile fights itself, wins, then loses

Ok, straight from the 'can't make this shit up' department we have these bullet points:

1) In 2007, Chile gov't tells Codelco (it's own wholly owned, nationalized, works-for-the-people copper company) to take around 5,000 sub-contracted workers and make them fully fledged employees (thus paying them more, giving them better benefits, pension plans etc)

2) Codelco (wholly owned by Chile, the gov't and its citizens etc etc) takes its gov't to court to fight the plan. It doesn't want to hire Chilean people to do Chilean jobs at Chilean mines to benefit the Chielan gov't. It wants to pay these people a flat rate way below the employees' salaries.

3) Codelco wins 7 out of the 8 cases and appeals the lost case.

4) The non-contracted workers now threaten strike action and halt production at Chile's own copper mines.

This is not small beer for the world market either, as Chile supplies around a third of all the copper in the whole wide world and Codelco is the world's biggest single copper company and about 30% of all Chile's copper comes from them (according to 2007 figures). News of the proposed strike action got to the market this morning and pushed copper spot to U$3.92/lb.

WHAT KIND OF KAFKAWORLD IS THIS? Codelco, run by Chileans for Chileans doesn't want to employ Chileans on a full roster basis. Of course it's going to add to costs, but what's the big difference between;

a) giving extra money to Chileans and less money to the Chilean gov't to spend on the Chileans, and
b) giving less money to Chileans and more to the Chilean gov't who would then spend it on....errrr...the

Go on, have a wild guess as to which group of nationals will suffer most if this strike comes to pass.* Which government will lose revenues? Which company will lose revenues for that matter. And remember, Chile is by general outside consensus the best run country in Latin America. Makes you wonder what these analysts are smoking, really......

Got PCU? Good, cos PCU not got Chile.

*Hint: country mentioned in title

Peru gets investment grade. BAP looks like a good trade for tomorrow

Today Fitch Ratings decided to up Peru's risk assessment to "investment grade". (Get news here if you speak Spanish and can't access the Fitch customer page). Technically it moved the rating up one notch from BB+ to BBB-, but what this means is that bigger banks and institutions will be allowed to buy Peru sovereign debt and put it into their long term holdings. In its PR, the Fitch dudette said,

'Peru's public finance and external account performance once again exceeded expectations, contributing to a better than anticipated improvement in the sovereign's financial ratios. As a result, most of Peru's financial indicators are now stronger than the median for low investment grade credits. Furthermore, it is important to highlight an incipient structural shift in the drivers of Peru's economic growth, as the most dynamic growth rates now stem from the non-primary sectors,'

Dontcha just love all that sexy economic-speak? You can get more tomorrow at Fitch's special conference call.* The news was greeted by backslapping and cheers in Lima, with analysts immediately predicting how local stock prices will rocket. But Otto sez, "Hold on a minute, dudes...keep things in perspective here."

1. Yes, it's good news.
2. Fitch has upped its rating but the other big guns, namely S&P and Moody's, have yet to move on this. This means a lot of banks and institutions will have to wait a while before they get the green light from their own bosses. I mean, did anyone notice that a Canadian ratings house upped Peru to investment grade late last year?**
3. Even when the big boyz get the green light to invest in Peru, it doesn't mean they will. Y'see there are three general classes of bonds risk, namely "speculative grade", "investment grade" and then "first class grade". Peru has just moved from spec to investment grade, and that good. But if the institutions don't want to take a flyer on low grade investment grades and prefer to stay with first-class grade only (and that, dear reader, is the vast majority of them), they'll not be forming a queue at the Bolsa de Valores de Lima in the next few days.
4. etc etc

So, bottom lining things here: The news is a definite positive, but it's not the last word in happiness either. I recommend you watch the Lima stock exchange carefully, and if here's a sudden pop tomorrow on this news sell the index either tomorrow same day or when the exuberance makes room for the post-party hangover. The real money influx will come a lot later, and there will be plenty of time to position yourself for the longer-term bullishness that the analysts are now predicting for NOW!! NOW!! NOW!!!***

As for something a little easier to trade in the US or Europe than the Lima stock exchange, avoid playing the move via miners PCU or BVN as they don't depend on the local economic environment for their profits. However, Peru has a bank on the NYSE ADR lists named Creditcorp Ltd (ticker BAP) which does pretty good volume. Here's the chart...

...and it might be a good way to play any short-term pump followed by the return to present levels. Buying this first thing at no more than U$80.30, then selling and reversing to a short later with a target of around $77 could turn out to be a good trade.

Remember this is not a stock tipping service here, but you can consider it a form of "marking your card" to which you can apply your own brains and then trade accordingly, always taking into account wider factors such as the Dow's daily performance, Shakira's new single etc etc. Have fun and keep it nimble.

UPDATE: Bloomberg has just put its copy out in English. Here you go.

UPDATE 2: I've just been informed by kind reader RR that Jim Cramer was pumping BAP earlier this week (I don't watch his show, although it's good fun for sure). That just gives us more reason to find a ST peak and short it as a quick-ish trade, ah reckonz.

*To participate in the teleconference, interested parties should call +1-866-723-3590 five minutes prior to the 10 a.m. start time and give conference ID number '42223776', the title of the call, 'Peru Upgrade to Investment Grade' or the call leader name 'Theresa Paiz.' For international participants, the dial-in number is +1-706-634-9315. To ensure there are sufficient telephone lines available, use internal conferencing capabilities, if possible, for multiple listeners at a single location.

** anyone except me, that is?

***you know that old saying about a fool and his money?

sneakydeaky quiztime (III): the answers

click to enlarge (worth it)

You could've knocked me down with a feather, ah tells ya. Eight players this week! That is so cool, and it fills me full of beans and love and rocking stuff like that to keep going with the sneakydeaky quiz. But I'm not going to spoil it all by prattling on for five paragraphs, so let's get on with the answers. Here we go!

I asked:
1) Which of these Latin American heads of state has NOT spent time in jail?
a) Rafael Correa
b) Michelle Bachelet
c) Lula da Silva
d) Evo Morales

The answer is a) Rafael Correa. You dudes clearly had Lula down as a troublemaker, but lots of you didn't know that Bachelet was arrested during the Pinochet era and she was tortured too. Evo had his chilltime back in the 80s. So the right answer was Correa, but it has to be pointed out that Correa has spent a lot of time in Belgium, and that's worse than prison, frankly.

I asked:
2) In which country is Latin America's biggest gold mine?
a) Mexico
b) Ecuador
c) Brazil
d) Peru

The answer is d) Peru. The mine is Yanacocha, it's run by Newmont (NEM) and Buenaventura (BVN), the World Bank has a minority share. Intriguingly nearly all production goes straight to Switzerland, and the tinfoil hat brigade can provide you with explanations as to why that is so.

I asked:
3) Which country has the biggest single iron ore deposit in Latin America?
a) Bolivia
b) Brazil
c) Peru
d) Mexico

The answer is a) Bolivia. Now the sneakydeaky part is that it isn't in production yet (feel free to complain to the editor...he'll laugh), but the El Mutún project in eastern Bolivia outstrips the mines operated by Vale (RIO) and by some order of magnitude. Bolivia is sitting on 15% of the world's known iron deposits at Mutún...pity they can't get organized enough to get it out the ground. No worries now though, cos they got some dudes from India to help out.

I asked:
4) How many people were killed in road traffic accidents in Argentina in the four weeks March 1st to March 28th 2008?
a) 170
b) 68
c) 155
d) 225

The answer is d) 225. And the only reason it was that low is that the agro strike has stopped all the cars from moving. Argentina; wearing seat belts just ain't macho.

I asked:
5) What percentage of Peru's population is below the poverty line, according to official gov't figures?
a) 42%
b) 35%
c) 32%
d) 26%

The answer is a) 42%. Incredible isn't it? Six years of non-stop high growth and they can't be bothered to feed their own poor. Go figure.........

I asked:
6) What approximate percentage of Venezuela's GDP comes directly from oil?
a) 30%
b) 40%
c) 50%
d) 60%

The answer is a) 30%. Oil is 90% of export money, and that's the sneakydeaky trick used to catch you. But anyway, 30% is one helluva big % for a single revenue earner.

I asked:
7) This chart (click to enlarge)...... ......shows the EMBI+ sovereign rating for three Latin American countries. Which of the follow is not one of the countries in the chart?
a) Ecuador
b) Colombia
c) Argentina
d) Venezuela

The answer is b) Colombia. Colombian debt runs at about 300 basis points, which is where Argentina and Venezuela were this time last year. Meanwhile, Ecuador (the blue line) has been hanging go girl!

I asked:
8) Who is the worst Finance Minister in Latin America*?
a) Martin Lousteau
b) Martin Lousteau
c) Martin Lousteau
d) Martin Lousteau

The answer was Martin Lousteau. Hey, you all got that

I asked:
9) Which country's coat of arms does NOT include a condor?
a) Chile
b) Peru
c) Ecuador
d) Colombia

The answer is b) Peru. Bizarro mundo, is it not? The land of majestic birds soaring over snow-capped mountains and bands of musicos panpiping El Condor Pasa to blotchy tourists doesn't have the big bird on the shield, while its Andean neighbours do. Ecuador even has a condor on its flag. You ROCK, Ecuador.

I asked:
10) Approximately what percentage of Chile's total electricity supply (industrial, domestic, the whole works) does state copper company CODELCO use?
a) 7%
b) 12%
c) 15%

The answer is c) 15%, and that's loads. No wonder they're biting fingernails about the electricity supply situation at Cochilco.


And that was the quiz that was. The winner is bigrichb, who knows what he scored so there's no need to embarrass the dude in public....seriously, congrats to you rich. I'll send over Oppenheimer via FedEx, ok?

By the way: Eccle, you sucked. Señor K, too chicken to play? EW, you're totally free to just need to be scared every week...just sit back and enjoy the muffins.

Look out for the next exciting installment of sneakydeaky quiz coming to a computer screen near you this weekend. Chau for now!

Argentina's agro strike: while you can bet on it ending now...

.... also bet that the 18% extra soybeans that's reportedly being planted next year in the USA is offset by a reduction in acreage in Argentina.

The Klishtina gov't has played it's rebate card, and in the eyes of the general public it looks like a good one. Basically, the small producers (farming 500 hectares or less) get around 80% of the recent tax hike back in tax rebates later. Or in other words, be good and pay us and we'll give you it back later.

This sounds fine on the surface, and this line of reasoning takes the wind out of the critics' sails in Buenos Aires. However, it's causing bigtime resentment amongst the small producer in the pampas because it's calculated that around 60% of the small producers farm "on the black" and don't pay taxes anyway. And as you might guess, it's tough to get a rebate when you don't file tax returns.

The upshot of all this is:
1) The strike will now peter out. expect limited resistance pockets, but basically the agro sector will get back to the fields to harvest their now slightly overdue crops.
2) Farmers are likely to plant more corn and wheat next year, and less soya.
3) Cristina is now deeply hated out there in the sticks.

As for my friend Lousteau, if this "concession" was planned all along I've underestimated him. But I highly doubt it. This whole cock-up was started by him in the first place, and the fudged compromise has left a stain early on the early days of the Klishtina government. What's worse, Klishtina had to cancel a state visit to London because of all this mess, and she'll really have it in for the Finance dude for missing one of her beloved trips abroad. I still say Lousteau is bad for the country as he knows only too well that by kowtowing to his mistresses, the basic problem of the weak peso policy will just get worse. If an economist can't see economic reality, then woe betide us all.


GLD and Warren Buffett

When a trade immediately goes wrong on me I often find a Warren Buffett quote will cheer me up. After taking the $91.68 on GLD Monday, this happened:
Ouch...a perfect time for a Buffett:

"..The dumbest reason in the world to buy a stock is because it's going up...."

Ah, good start! Bit of contrarian from WB is always good for a massage. Got another one Warren?

"..If I like a business, then it makes sense to buy more at 20 than at 30..."

Cool dude....GLD isn't exactly a business, but it fits close enough. Just one more?

"..I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out..."

Yeah, that's more like it. Gold under $900 is a cinch buy. So i added more today at 86 and change. After all, when you hold more gold than anything else, you know what patience is all about. GLD: a good way to trade the metal.

Warren rocks.

Peru's headline inflation in March: 1.04%

As part of this post a couple of weeks back, I mentioned that Peru's inflation rate had
"...climbed 1% in February...... The gov't claims it was due to the landslides and the protests that cut supply lines to Lima. ...... 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...."

So let's welcome all cockroach-humans to the show, because Peru's March inflation figure for Lima and Metro came in at 1.04%. Holy unpopular presidents, Batman!

What's the problem here?

1) YoY inflation is now 5.6%
2) The gov't's inflation target of 3% maximum for the whole of 2008 has already been blown out of the water.
3) The moneydudes will almost certainly hike interest rates to stop this outbreak.
4) The Peruvian Sol has already done this....

.... and under higher national interest rates it can only go higher vs the greenback. With Exporters already squealing from the pain, the fast rise in non-commodity exports (such as the quickly expanding agro export sector, led by asparagus farming) will be hit hard.
5) etc etc...err...dude. Meaning there are plenty of other knock-on effects.

Carranza prepares inflation data for the next press conference

But, one of the major problems here is political and not economic. Every Peruvian over the age of 40 remembers what a hash Alan Garcia made of things in his first presidency in the 1980s. Alan brought economic meltdown upon Peru due to bad decision-making. That's something not even the ruling APRA party can argue with. This time round, he's promised to be good and kind and has repeatedly said that he has learned from his previous errors, so the combo of Alan and APRA in power and then suddenly a big surge in inflation is a very unstable mix indeed.

It may well be true that circumstances are different this time around, and it may well be true that Garcia is following a wiser economic model, and it may well be true that external forces are to blame for this inflationary outbreak and the gov't is innocent, but that won't matter a jot to the people of Peru.

Now, there's plenty more to say about these inflation figures, but the details can wait for another post (I got accused of rattling on too long last week, and it's still stinging, SB). But one thing to point out is all that gov't line about middlemen pumping up prices has been shown to be total BS, as wholesale prices rose 0.84% in the period too. With retail prices up 2.18% in the first three months of the year and wholesale prices up 2.23%, Alan will have to find another excuse. But hey....Otto's always on hand to oblige. Last week, I floated an idea over to Alan about who to blame next. Let's see how long it takes, eh...........

PdVSA earnings-media-bias-BS-watch update.....come on dudes, you can do better than this.....

We've had a couple of lukewarm potshots in Spanish, but up to now only the Chávez-hating "El Universal" has tried to slag off PdVSA's 2007 earnings report in English. I'll paste the Universal report at the end of this note, cos it's a minor masterpiece of obfuscation and it's worth a read for the giggle. Dudes, I do this numbers thing for a living but I've read this article 4 times now and I still don't have a clue as to what they're talking about. Well, I do really...I know what they're trying to say...they're trying to say debt is up at PdVSA and that's bad and all that. ..kinda ....errr... dude.

Well, since last week's pre-emptive strike seemed to keep the BS journalism at bay, let's just explain about this debt thing before any innumerate LatAm commentators have a go at playing casio-god. Y'see, PdVSA's debt stood at a touch under U$3Bn at the end of 2006, and is now a smidgen over U$13Bn. "Whoa!" I hear you say, "debt is bad, isn't it, Otto?" Well put it this way, saltamontes; if you had a real crappy business and you went to the bank and said, "Hey bankdude, lend me some serious money so I can expand my biz", the bank dude would probably click the intercom on their desk and calmly say to secretary "Call security please". But when PdVSA goes to the debt market, people just swoon and say, "YEAH! guys are well cool and making serious money and want to expand operations and drill more and build more and produce close on double in four years' yeah, here's a large wodge of moolah. Enjoy."

U$13Bn sounds like a lot of money....hell, it IS a lot of money. But when the debt is in long term bonds and only comes to about 12% of annual revenues anyway, there's not much to worry about......truly.......I'm not joshing you here, ok? If oil suddenly dropped under U$60/bbl, then there might well be some caca hitting ventiladores. But oil is over U$100/bbl, and for a bit of context just the other week the big bad futures market was trading contracts to sell oil at over U$100/bbl for delivery in the year 2015, so take a wild guess about the chances of seeing U$60 oil while the dollar continues to crap out under Bernanke's "gotta save growth" deathspiral.

Ok..enough already...I'm starting to get fuzzy. All you need to remember here is that the debt taken on by PdVSA is totally under control and they're going to use the money they've borrowed to produce more oil down the line. Trust your uncle Otto on this one, and if you get some mathwhizz spewing a hatful of numbers at you, send him over to me and I'll show him what I do with slide-rules when i'm really pissed off with people who tell fibs using numbers.

Here's that weird Universal note:

Pdvsa's debt compromises 28.5 percent of assets

The sharpening indebtedness of Venezuelan state-run oil firm Pdvsa over the last 12 months has drastically changed the company's accounts to the extent that its debt to net worth ratio at the end of 2007 was 28.5 percent, the highest in the last decade.

Pdvsa's consolidated debt totaled USD 16 billion in 2007, comprising USD 13.12 billion in long-term debt and USD 2.87 billion in current debt. Most of the long-term debt -USD 11.84 billion- was contracted by the holding in Venezuela, where it issued USD 7.5 billion in debt bonds in April last year.

Following an oil strike in 2003, and particularly in 2006, Pdvsa implemented a strategy of debt buyback and amortization. This allowed reduction of the consolidated debt to USD 2.91 billion at the end of 2006, thus taking the firm's debt to net worth ratio to 5.4 percent in 2006.

However, in 2007, Pdvsa's indebtedness soared USD 13.09 billion, or 449 percent. Consequently, the corporation exceeded its debt to net worth ratio in 1999, when the consolidated debt was USD 8.51 billion versus a net worth at USD 32.89 billion.

Pdvsa CEO and Minister of Energy and Petroleum Rafael Ramírez dismissed the subject last March 28 in a news conference intended to disclose the corporation's audited financial statements. This is the first time Pdvsa delivers the audited financial statements on time over the last five years.

Ramírez underscored that Pdvsa's net worth jumped from USD 53.10 billion in 2006 to USD 56.06 billion last year. However, this 5.5 percent increase was significantly below the expansion of debt in the same period.


It's not difficult to make money in the stock market....

...all you need to do is arm yourself with facts and then let the idiots rant on the other side of your trades. Then afterwards say, "Thank you for giving me your money" and go live on a classy beach resort somewhere. Easy.

Here's an example of someone with more money than financial sense. To be honest, I don't know how much money the guy has (and i don't care) but it'd still be more in relative terms than the brainpower used to put his note together. Whatever; check out his biography on site for a laugh and find out how much he thinks about himself.

Ok, no more ad-hom..what's the point here? Well, the dude basically cherrypicks a single fact about the Brazilian Real, then notes the BRIC-to-US market hedge has fallen through in the last month (using, hilariously, a two year chart as evidence...this probably cos he tried setting the bar at 6 months then at 12 months and found the facts didn't fit his theory) and from this comes up with the line he wanted to get out all along: "...Commodity currency countries are not a fun place to be right now..."

I mean, where do you start with this BS? He chose to highlight the one month performance of the Braz Real and not the 3 month (click all charts to enlarge)
or the 12 month
Neither was the Yuan mentioned, but here's the chart, just to be helpful
As as for commodity countries, how's the Chilean Peso doing, dude?
Ready for the Peruvian Sol?
Or even, amazingly for some, the Venezuelan Bolivar Fuerte? (parallel rate version, of course)
Oh, and just while we're being clear, all the countries mentioned have record currency reserve levels right now. I could also start talking about the relative performance of the local stock markets compared to the trainwreck in the "non commodity currency countries"....

....but you should have got the point by now.

But the most important part of all this is DON'T DISCOURAGE THE IGNORANT. Let them blab on about things they know little about, cos there are a never-ending stream of badly informed sheep ready to listen to ego-warriors and who will then oppose the well-researched investor. In your mind's eye, just imagine a whole queue of people waiting to give you their money. Why should you say, "'re's cool now.....enough.....keep it for yourself" when these dudes keep insisting? After all, they'll either give it to you or to somebody else. What you can guarantee is that they'll not win at this crazy investment game until they've worked it out for themselves.

Why do people live at La Oroya?

If you don't know, La Oroya is a town about 80 miles East of Lima up in the mountains. It's also home to the Doe Run lead (and other metals) smelter and classed as one of the top ten most polluted places in the world, according to The Blacksmith Institute.

Undisputed stats from the town are pretty dire. The one that's reported by every story is the amount of lead (Pb) found in children's blood. You can check that link above for more, but basically lead levels are three times above world accepted limits at the town (33µg/dL instead of 10µg/dL), though you'd never know that from the Doe Run press releases who point out that Peru law allows 40µg/dL. Funny how a mining and smelting country sets its own toxicity levels, innit?

So anyway, whenever we get a report on the ghastliness of La Oroya and the obligatory photo of kids in front of the smokestacks, just like the ones here, here and here (and there are plenty more where they came from) the thing that comes to this naturally contrarian mind is, "Why do they live there?" I mean it...why? If I said, "Dude, come live in dangerous place for your health where kids suffer chronic diseases", would you be tempted? The answer: You earn serious money working at Doe Run Peru.

Click on the chart and you'll see people living in La Oroya (no surprises for guessing where nearly every Oroya resident works) make that much more than average monthly Peru salaries, no matter what level of education you have. Look, sure, the environment is important. I'm all for carbon credits and climate crises and 'An Inconvenient Truth' left me going "uh oh...gotta do something...this ain't funny no more". But there's a couple of things in play here only the smarter enviro people catch.

1) A Peruvian manual worker puts ten years in at La Oroya and he can buy a house, a car, raise his kids, send them to a decent secondary school. This improves the standard of living and social awareness in Peru. It's a long-term win-win.

2) Without the money generated by Doe Run, there wouldn't be a hospital about to be built there, which will benefit not only the 35,000 townsfolk, but the catchment area of smaller villages around La Oroya.

3) Etc

Also, Doe Run Peru are cleaning up their act. Since the new owners took over the plant in 1997 they have dragged their heels on the environment side of things, but according to the latest reports contamination is down. So that's's late arriving but it's cool. NGOs and new gov't legislation has pushed the company and many others like it into doing something about pollution levels and the efforts made by the enviro groups are worthy of applause. But the fact is that, by and large, miners are cleaning up their acts in Peru, in Latin America and around the world. The don't-give-a-damn-about-the-locals days are over down here, cos the locals now have enough clout to decide whether a miner gets to mine in their backyards. Test cases of Esquel in Argentina, Majaz in Peru, Ascendant Copper in Ecuador all show that green movements can stop a project in its tracks, and that was plain impossible 30 years ago.

So the bottom line is being environmentally friendly is now good for business in mining world, and miners now know it. That's the way forward, folks. Lay down the rules and then say "be clean and make money, or be dirty and get booted out." With the amount of moolah to be made in the sector these days, the miners play ball. Because of that La Oroya will eventually benefit, not just with high salaries but with cleanER air and a shiny new hospital, and my stars they deserve it after all they've been through.

not short

this dude isn't short; me neither

I'm feeling all diligent and disclose-worthy this morning. I'm not sure if calling all trades via the blog is such a cool idea for every day, but today is today.

Two things this morning:

1) Cover the BG short. It touched 85, but 86 is good enough. Position taken at 98 and 95, exited 50% at 91 on Friday and 86 today. Job done.

2) Buy GLD. Those nice dudes over at the market offer $91.64. Thank you, nice dudes.

A word on gold and BullionVault

I'll surely be writing more on gold in the days and weeks to come, but today is to explain a bit about what you see above this post.

Our site sponsor is BullionVault (see the link above and below in this post, too), and I sincerely recommend using them to buy and sell gold bullion. They've been in business for decades and the service is very safe, quick and totally secure; check out the extensive explanations of what they do and how they do it over at the site. If you join via the link (quick sign-up procedure) you get a free gram of gold from these guys (worth about 30 bucks right now, which is generous of them to be sure) and you can trade that gram for cash no worries.

Buy gold online - quickly, safely and at low prices

Another rocking reason for joining is you get access to the articles written by Adrian Ash. Now people that know me also know I'm no fan of gurus and stuff (to put it mildly), but there are a few public zone people I do read and learn from, Ash being one of them (joining the Coffin Brothers on junior miners, Gary Tanashian from biiwii on charts'n'stuff and Don Coxe on the grand macro worldview perspective). Ash is as good as it gets on gold, and getting first run at his output via BullionVault is worth its own weight. In the words of the blurb that comes at the bottom of his notes;

"Adrian Ash runs the research desk at Bullion Vault, the world's fastest growing gold ownership service. Formerly head of editorial at Fleet Street Publications – London's top publisher of financial advice for private investors – he was City correspondent for The Daily Reckoning for four years, and is now a regular contributor to 321gold, FinancialSense, GoldSeek, Prudent Bear, SafeHaven and Whiskey & Gunpowder among many other leading investment websites. Adrian's views on the Gold Market have been sought by leading news organizations including the Financial Times, AFX Thomson and Der Stern in Germany."

So there you go. To be totally straight with you, if you click through via the above link and then go for it and set up an account, BullionVault credit me with a very small commission, but that's not what this is about. Your caring and thoughtful Otto has owned and reco'd gold bullion as portfolio main core since the stuff was selling at U$451/oz (silver fizz too), and with the nerves around the market version 2008, preservation of capital should be one of your main considerations as an investor. And that is a direct arrow to owning gold, precious metals etc. Ok, no more. Thanks for listening.


SoyaWars!™ 2.0 What you need to know for the week in Argentina

The Argentina farmers' strike is back on. The agro boys sat down with the gov't boys Friday after Klishtina gave it the "good of the country we must talk" bit, but after five or six hours where agro said, "what if we do this?" and gov't said "that's impossible", then agro said "well what about this, then?" and gov't said "that's impossible" etc etc, the agro guys got a bit cheesed off and calmly left the room. Next days' vote among grass roots farmers to continue the strike and blockade took about a nanosecond to decide. Right now most roads are now blocked in the key Buenos Aires zone and no food trucks are getting to the capital.

Talks between gov't and agro resume Monday (mañana), and according to Argentina's fairest mainstream newspaper the two sides are moving on the following agenda:

Gov't Boys Position
  • No backing down on the export tax hike for fear of looking weak.
  • Possible rebate of between 5% and 8% for producers.
  • New organism called "Subsecretary of Family Agriculture and Rural Development" to look after the needs of the small farmer.
  • Credit lines at below market interest rates.
  • Possible subsidies on fleet transport and fertilizer prices.

Agro Boys Position
  • The gov't must back down on the export hike, and re-set the tax to pre-11th March level (eg 35% for soybeans)
  • Long-term plan to stimulate cattle ranching, as soybean farming has taken away grazing land and lowered production.
  • Allow more export of prime beef cuts
  • Allow more milk exports at world market prices.
  • Allow wheat exports to resume.
  • Gov't must recognize the difference between the issues of small scale and large scale farmers.
In a nutshell, these lists are about right. "So what to make of it, Otto?" I hear you all ask. Well, funny you should ask that, cos.......

Otto sez:
The gov't shouldn't worry about looking weak, because it already looks pretty debil to anyone with half a brain. Klishtina thinks backing down = weakness....pathetic, isn't it? The rebate idea may work, but it would depend on who is let in, what the conditions are etc. The other measures proposed by the gov't are nothing new, and were on the table before the strike was called. Looks like they make the gov't wish list just to try and pad it out a bit.

As for the agro boyz, there's nothing surprising there. The "allow us to export more filet mignon" line is there to be conceded, cos the Cuota Hilton system isn't going to change overnight cos of a few soya-related roadblocks. The difference between the lot of the small farmer dude and the big farmer dude is the whole point of all this. The agro boyz have to make it clear that this new tax hike is a bridge too far for the little guy, and they deserve a break.

So the scene is set for tomorrow's chat, then Klishtina is going to speak to the descamisados in a big Plaza de Mayo rally Tuesday, we hear. Meanwhile, word is that the farmworkers' protest rally (called off last Friday after Klishtina's more conciliatory-sounding Thursday afternoon speech) is back on for this week, and the gauchos will converge on the Plaza de Mayo too*. Expect plenty of posturing and crap, and don't expect Porteños to be eating much bread next weekend. The fun bit for traders will be watching how the ever more likely soybean supply crimp will play against the new stricter CBOT margin rule. My best reco on that is "keep it nimble".

*Hopefully not the same day, cos that would be nitro+glycerine

pathetic attempt at begging

This is a quick post to point to the paypal donate button on site (top right corner) and say that;

1) There's zero obligation, but a little something in the begging cup would be appreciated if the info found here has been useful to you. No coin too small.

2) The donate button will only be there til Wednesday, cos there's no way I'm going to get all heavy about this.

Totally up to you. There will be nobody starving at this end, so just relax and enjoy the fun and don't feel under pressure. Peace to you all.

high yield LatAm plays

Well I got a piece of feedback from a mail subscriber asking about high yielding LatAm stocks. This totally rocks because:

1) Good to get mails from out there
2) Nice to hear people care enough about LatAm these days to consider buying and holding, not just splashin'n'dashin' with the hot money tide.
3) ST trades are all fun and that (esp when they work out like the BG play last week), but the real money is made by long-terming the quality stocks. If the same stocks pay out a big divi too, then Otto sez "yeah!".

So here are three ideas for you. I've chosen these cos they represent three different ways of playing the high yield concept down here, and all are good. Let's make it crystalline that there are plenty more like these, so you can either investigate these three a bit more and go with them*, or use them as a starting point to check out other plays on the same theme. By the way, as always click on the charts to make them bigger.

So on with the show, and the first one is LAQ. This is the Latin America Equity Fund Inc, a closed end fund run by Credit Suisse NY branch. If you check out the chart here.... might go, "Hey Otto dude...looks OK, but that was a big drop late last year! Wazzup there?"
That's when I'd answer, "Yeah dude, but check out this chart of the dividend payments....

...and tell me that last U$9.93 payment totally rocks."
And that's when you'd say, "Hey Otto...that totally rocks."
And that's when I'd say, "Dude, you're right."

So there's an idea number one, a fund that specializes in the region, covers a whole range of stocks (U$282m under management) and pays a cool divi every year. Now for idea number two, my old pal Southern Copper (PCU). The chart is not news here..........

.....but here's a resume of the dividend yield since 2004, and you can see how these dudes take care of the shareholder.
Well, in fact it's more like they're taking care of themselves, cos the major shareholder is Grupo Mexico (GMEXICOB.MX) with over 75% of the stock. GMEX use PCU as its own personal cash cow, so the whole ballgame here is to coattail with the big money, buy'n'hold PCU and enjoy the generous dividends they pay out every quarter. As mentioned before, this is not rocket science investment. It's plain, simple and successful. Got a problem with that?

The last idea is a bit more exotic and off the beaten track, but those of you with flexible brokers can get a chunk of Mirgor (MIRG.BA), a very strong autoparts company in Argentina. Reasons to like the company are:

1) This chart. Rocks, no?
2) The company has just started paying dividends again after a 6 year break.

3) The 2007 results were blowoutly wonderfully strongly magnificent (up nearly 50% YoY), and MIRG now has ArgP$223m hanging around in cash. Now the company has said they're not paying out divis before they've decided on the capex schedule for the year, but I reckon about P$60m of that could be paid out as a cash dividend after the dust settles, which works out at a juicy P$30 per share. Now check that share price again...yep P$150. Got it?

The problem with Mirgor is that although it quotes on pinksheets it's about as liquid as molasses at the North pole, so you'd probably need to go via the Argentina stock market to put some in your port. But I say it's worth the effort (but hey....that's just me).

So there we go, three ways to play high yielders down here. One big cap miner, one fund play, one small under the radar local stock. As a different chapter of the same book, I've already pointed out Ecuador sovereign bonds, and you could also consider that line. All feedback or other ideas for posts like this very welcome. Mail rocks.

* ALWAYS do your own DD on any play before investing.