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Brazil: US economy still in the spotlight – September 2010- IXE BANIF – Monthly Analysis

Little hope for a short-term change in the economy

For September, we foresee that attention will continue focused on the US economy, which has been showing signs of weakness since the beginning of 2H10. This expectation is the same we had for August, which proved to be correct. The main event we highlight for September is the FOMC meeting on the 21st, which might raise market expectations of new measures to improve economic growth. The latest statement on the economy from the President of the Central Bank mentioned that the Bank is ready, if necessary, to intervene to adjust the economic trend. However, its portfolio of potential measures is, in our view, limited due to the current low level of interest rates. Meanwhile, data released on housing, payroll and investment are likely to drive the market in the ST.

Concerning the rest of the world, we believe that Europe will continue out of the spotlight, with Germany leading the local economy well. We believe that the only negative in the month could come from China, which has been releasing some mixed and inconclusive data lately.

In September, with little change in the scenario and no major event in sight, we expect the market to move sideways and with less volatility. Therefore, we decided to maintain our defensive view and keep the core of our previous portfolio. We have added Tietê, MRV and EZ Tec, increased the weight of Petrobras (from 15 to 20%) and reduced the weight of Eletropaulo (from 10 to 5%). We have withdrawn B2W (weak 2Q results without good ST expectations), CSN (due to its deteriorated ST outlook) and Tegma (stellar performance in the month).

Petrobras is the month’s highlight

Last month, we predicted that the start of the political TV campaign in August, at presidential level, would be exciting and move the markets. The reality proved to be very dull, with the Labor Party’s candidate having the unquestionable advantage and no response at all from any of the main financial markets: equity, interest rate and FX. In September, we believe that Petrobras’ capital increase operation will be the highlight. The weak performance of the company’s shares in the past 1.5 years contributed to holding down the Ibovespa. We believe that, after the capital increase, they can have the opposite effect.

When it comes to economic data, we believe the two most important events of the month will take place in the first week. These are the Copom meeting on the 1st and the 2Q GDP report on the 3rd. We expect an unchanged Selic rate of 10.75% for the former and a 1% change for the later (QoQ seasonally adjusted, or around 8% YoY).

Read full analysis Brazil – Monthly Allocation – September 2010

Source: IXE-BANIF, 01.09.2010

Filed under: BM&FBOVESPA, Brazil, Latin America, News, , , , , , , , , , ,

Energy: Don’t Believe Long-Term Oil Forecasts

On 4 October 2009, The Wall Street Journal ran an article World Need for Oil Expected to Ease (subscription might be required), where the author, Spencer Swartz, wrote:

The International Energy Agency next week will make a “substantial” downward revision to its long-term forecast for global oil demand, a person familiar with the matter said, marking the second year running the group has slashed its view of the world’s thirst for oil.

If demand pessimists are correct, future increases in the price of crude could be damped as weaker consumption stretches world oil supply by billions of barrels. Various analyst estimates maintain that the roughly 2% a year average growth rate in world oil consumption seen earlier this decade — the biggest reason for crude prices hitting a record $147 a barrel last year — may turn out to be an anomaly and that annual growth in the neighborhood of 0.5% to 1% is more the norm.

The reality is that no one knows what the long term future holds. The IEA itself struggles with the Bull versus Bear oil outlook. Ask yourself, how many pundits foresaw the mess we are in now and anticipated the dramatic easing of oil demand?

Sure, one can gather relevant information and make a reasonable guess as to oil demand next year and the year after that. But after five years, the potential paths of demand growth become unwieldy. How will economic growth be sustained over the next five years? Will the OECD countries lag emerging countries? Will China and the rest of Asia power ahead and create substantial demand? If Asian countries do power ahead and create many millions of middle class citizens, will they demand their own vehicles and tickets on jet planes to see the world? Will Brazil and other South American countries enjoy strong economic growth? Will the Middle East be stable over this period? Will Iraq resume its full production capabilities? As you see, one can begin asking any number of questions that are impossible to answer with an accuracy or certainty and that might have a major bearing on demand or supply or both.

What do we know? We know that for a long time, oil prices were usually within $20-$30 real per barrel. Now those prices are laughable. No reasonable person expects the world to return to those prices any time soon. Many major oil fields around the world are in decline. Oil companies are searching in more remote and sometimes more unfriendly regions of the world to develop further existing fields and to discover new fields. And, the rise of oil prices has given new prominence to some national oil companies. A sample list, though incomplete, of companies include: Gazprom OAO (OGZPY.PK), Petróleos de Venezuela, S.A., and Petróleo Brasileiro S.A. – Petrobras (PBR).

If we were to accept the 1% annual growth of oil demand mentioned in the WSJ quote for a long duration, what would that mean or imply? A child born tomorrow will see by her seventieth birthday a doubling of daily world oil production from about 85 million barrels per day to 170 million barrels per day. Moreover, during her seventy years, the world will have produced more during that time than the total cumulative amount prior to her birth. Call me a skeptic, but I am unable to see where we would find that much additional oil to produce at such high rates for such a sustained period.

To be clear, neither the article nor the IEA is suggesting that we endure a 1% growth forever. Rather, I wanted to use this seemingly small innocuous number of only 1% growth to draw attention to its implication. If the long term growth were 2%, then in 35 years the daily world oil production would double to 170 million barrels per day and the oil produced during those 35 years would exceed the prior total cumulative amount of oil produced.

I recommend two excellent sources of information to learn more about oil, oil demand, oil prices and various policy initiatives:

  • Statistical Review of World Energy from BP p.l.c. (BP). I found the link to the Adobe pdf document toward to the bottom on its homepage.
  • Monthly Oil Market Report from the International Energy Agency. The link is to the webpage that hosts the document that is released two weeks after the initial release date. Subscribers receive immediate access through a different link.

Both documents are extremely helpful. I find the BP document provides concise information and historical context. The IEA document provides the agency’s latest thinking and forecasts.

As the world struggles to find new sources of oil, there will be dramatic changes. I have already discussed some questions we should ask ourselves as we contemplate future oil demand growth. Of course, many more questions need to be considered. And I have indicated that some national oil companies have gained strength and prominence with higher oil demand and prices. As investors, we should also think about what long term oil demand growth means for oil sands companies such as Suncor Energy, Inc. (SU) and Canadian Oil Sands Trust (COSWF.PK), and for large multinationals such as ConocoPhillips Company (COP), Chevron Corporation (CVX), and Exxon Mobil Corporation (XOM).

As demand continues to rise, I am curious what will happen. Will scientific breakthroughs help? How will the world cope with the environmental consequences? How will people adapt to possibly much higher prices? How will countries and regions change because of either having or lacking domestic oil supplies? If the world does experience higher prices, what are the implications for global world trade? And do higher prices imply that people will travel less and have less of an understanding of other regions? These questions are just a small sample of what investors should begin considering.

A few years ago, Professor Bartlett gave a compelling lecture, captured in a series of YouTube videos, to some students at the University of Colorado. In his lecture, he discussed oil demand growth. The lecture starts a bit slow; however, when you reach the latter part of the third video, you’ll see how the prior information is relevant to his discussion on oil. In other words, because they are important, don’t skip the initial video segments and jump to the third. I urge you to watch the complete video series.

And after you’ve watched the videos, ask yourself, “What time is it?” This question will make sense once you’ve seen the videos.

When I initially saw the WSJ article, I was drawn by the long term forecasts. My personal bias is that most longer term things in life are difficult, if not impossible, to forecast with any reasonable degree of accuracy. Then as I read the article, I saw the 1% growth number, which by itself seems very innocuous. But if you think about what 1% growth means over a long and sustained period, you quickly realize there are going to be changes. Moreover, the world has already witnessed a significant shift in oil prices over the last decade. We are no longer in our prior historical norm of $20-$30 per barrel. Some might argue that we are now in unchartered territory. As part of that possible unchartered territory, I wanted you to think about some larger questions. The questions mentioned in this article are just off the top of my head without much thought. I am sure you can think of many more. And last, I wanted to draw your attention to Professor Bartlett’s excellent lecture. His lecture will make you think about oil demand (and others) growth differently. I hope this article causes you to further your own research.

Source: Seeking Alpha, 08.11.2009

Filed under: Brazil, China, Energy & Environment, Mexico, News, Risk Management, Venezuela, Vietnam, , , , , , , , , , ,

Brazil: Catching its Breath – November 2009 IXE-Banif Market Analysis

Investors have at last decided to look around them. The strong rally of the markets in 2009 seems to have ended, or at least to have entered into a short-term profit-taking period, while waiting for data that justifies a new advance to 100 k points. The conclusion that the recent rally was stronger than the economic numbers justify seems to have given the tone to the last few trading days in October and should continue so into the first few days of November.  Download: Brazil – Monthly Allocation – November 2009

Fear for the future of the US economy is prevalent both there and here: and not without cause. The American economy remains the world’s motor and, if it reduces speed, the rest of the world’s economies will follow. The US recession ended with a GDP growth of 3.5% in 3Q09, above the most optimistic forecasts. The fear now is that the Government is removing the help that allowed this strong growth and that the economy does not have the strength to continue to expand without it and may even contract in the next quarters. Concerns about inflation also increase, which will certainly lead to interest rates going up, with a consequent reduction in the capital invested in emerging countries.

In Brazil, the elections begin to call the attention of investors. The movements intended to strengthen candidates do not always produce the results expected. Alliances begin forming but, for now, we do not even know who will be the candidates.

Waiting would have given better results
Worrying about the cost to Brazil of an expensive Real, the Government attempted to halt its appreciation. If it had waited a few more days, the market would have taken care of the problem itself. The strong sales of the last few days, and the return of these resources to their country of origin, led to the depreciation of the Real that the 2% tax on the entrance of capital did not manage to achieve. Some believe that the implementation of the IOF is an attempt to garner income and balance the Government’s accounts. If this is so, the new tax will remain in place for some time.

Shares from the domestic market should outperform
With the end of reduced IPI on the sale of vehicles, with it remaining only on the sale of white line products, we believe that the steel market has leveled and focus now shifts to the mining market. Therefore, this month we opt for a greater concentration of companies that focus on the mining sector, as well as continuing to prefer stocks in companies linked to the domestic economy.

Outperforming the Ibovespa – Recommended Portfolio (“LONG”)
Stock – Catalyst/fundamental
BRTP4 – greatest potential to appreciate
CTAX3 – good results in the 3Q09 lead to positive expectation in coming quarters
CSNA3 – increase in the sale of minerals from Namisa to China
EQTL3 – pure distributor that should have a dividend yield of at least 10%
ITUB4 – expected continuity of good results posted in the 3Q09
JHSF3 – one of the cheapest plays in the sector
LIGT3 – discounted in relation to its peers
LAME4 – increase in sales with the arrival of Christmas
MMXM3 – beginning of iron ore price negotiations
PCAR5 – of the retailers, it benefits the most from the maintenance of the IPI
PETR4 – pre-salt regulations
VALE5 – increase in fines and pellets sales

Short suggestion for November
BRML3 – price pressure due to sale of important stake
HYPE3 – price pressure due to sale of important stake

Source: IXE-BANIF, 03.11.2009

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, , , , , , , , , , , ,

Brazil: Petrobras and VisaNet under investigation

Petrobras Probe Starts as Gabrielli Faces ‘Crisis’

Aug. 6 (Bloomberg) — Petroleo Brasileiro SA, struggling to meet output targets and finance a $174 billion spending plan, faces a new challenge today as Brazil’s Senate probes claims it evaded taxes and funneled cash to government allies.

The investigation, prompted by opponents of Brazilian President Luiz Inacio Lula da Silva, focuses on allegations Rio de Janeiro-based Petrobras evaded 4.4 billion reais ($2.4 billion) of taxes, overpaid for goods and may have favored the president’s supporters when it made charitable donations. Chief Executive Officer Jose Sergio Gabrielli denies the claims.  Read full article by Bloomberg here

VisaNet Faces Antitrust Probe by Brazilian Justice

Aug. 6 (Bloomberg) — Cia. Brasileira de Meios de Pagamento, the credit-card company known as VisaNet, is being investigated for possible anti-competitive practices by the Brazilian Justice Ministry.

The probe also involves Visa do Brasil Empreendimentos Ltda. and Visa International Service Association, the ministry said in an e-mailed statement today. The ministry, through its Economic Law Department, or SDE in the Brazilian acronym, will assess the exclusive right of VisaNet to accredit businesses to accept cards carrying the Visa logo.

This “practice” is against consumer interests and “substantially” reduces competition in the industry, the ministry said in the statement. Read full article by Bloomberg here

Source: Bloomberg, 06.08.2009

Filed under: Brazil, Latin America, News, Risk Management, , , , , , , , , , ,

Brazil: No short-term triggers – August 2009 IXE-Banif Market Analysis

We do not see any short-term triggers for the Ibovespa in August. The Brazilian Central Bank should keep the basic interest rates at 8.75% to the end of this year since Copom considers that the current level is consistent not only with the path that inflation should take in 2009 and 2010, but also with the recovery of economic activity. Macroeconomic indicators (employment, industrial production, etc) that showed a slight improvement in 2Q09 should continue their gradual upward trend, but at lower levels than before the start of the financial crisis.

Brazil – Monthly allocation – August 2009

The Government has used fiscal instruments in its economic policies to increase consumer confidence after the crisis. These include the reduction of the IPI (tax) on the automobile, electronics and capital goods industries. Due to the likely extension of these measures, we believe that the sectors most linked to consumption could benefit in coming months.

If, when released, economic data and company 2Q09 results confirm that the crisis has hit rock bottom, or start pointing to a small recovery, they may help the performance of the Ibovespa.
On the foreign front, although US GDP, published last Friday, July 31, came in better than expected at -1%, rather than at market expectation of -1.5%, its composition does not show any consistent or significant improvement. In particular, data on US family consumption worsened again, after a slight improvement in 1Q09. Therefore, we believe the foreign front will continue uncertain.

Concentrated Ibovespa
For the Ibovespa to go up by the end of this year, mining, steel and financial institutions would need to rally, as they carry a heavy weight in the index Petrobras and Vale do Rio Doce alone account for approximately 33% of the Ibovespa. We forecasted the Ibovespa at 48,600 points by December 2009, which leads us to believe that some profit taking will take place by YE. Because of the above points, we reduced the weight of commodity shares in our August portfolio and selected companies that we believe will report good 2Q09 results and dividends.
Outperforming the Ibovespa
Stock – Catalyst/Fundamentals
AMBV4 – Solid market share and volumes
BRTP4 – expectation of reporting a good 2Q09
CTAX4– excellent 2Q09
CPLE6 – discounted shares
ELPL6 – dividends regarding 1H09
GOLL4 – good 2Q09 could reinforce investor confidence
ITUB4 – 2Q09 forecast
JBSS3 – good 2Q09 and gradual recovery
MMXM3 – should be the target of acquisition
PCAR4 – resilience of the food segment
PETR4 – reducing weight in the portfolio
USIM5 – recovery of demand and price in the domestic market
VALE5 – reducing weight in the portfolio

Source: Banif – IXE, 03.08.2009

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, , , , , , , , ,

Brazil: The chicken and egg – June 2009 IXE-Banif Market Analysis

The Brazilian stock market brings back to mind the decoupling theory. Foreign investors continue to place their resources in Brazil, in particular in the stock market, which received approximately 40% of the total. The problem is that the good feeling from investors does not reflect in the economic scenario. The GDP being published on June 09 will show a -2,3% drop, with expectations that things will get better only in 4Q09. The data showing the fall in capital goods capex reflect the low expectations for growth. The 80% utilization rate of installed capacity is worrying. This should result in the Brazilian Central Bank cutting the basic rate by at least 75 bps this month. The savings problem seems to be resolved: not to the satisfaction of all, but enough so as not to create political contention in the pre-election year.
The Dollar and the Brazilian currency
The Real appreciated again, closing the month below R$ 2.00/US$. However, the question asked is whether it was the Real that appreciated, or the Dollar that devalued. The prices of many goods suggest that it was the Dollar that depreciated, which will result in a lower cash generation for companies, but better results (base for dividends).
Pension funds; the next buyers
Each time interest rates drop, discussion on pension funds increasing their participation in the stock market becomes prevalent. The reason is simple: low interest rates do not permit them to reach their targets. However, it is important to highlight that pension funds have already increased the participation of equity in their portfolios, from 10% some years ago, to around 30% this year.
Good winds continue to blow
To a lesser degree than in past months, we believe that, in June, the stock market should continue to perform positively, or at least flat MoM. We therefore reduce our exposure to defensive stock and concentrate our portfolio around the main representatives of the Ibovespa. Download: Brazil – Monthly allocation – June 2009 IXE Banif

Outperforming the Ibovespa – Recommended BUY Portfolio (“LONG”)
Stock – Catalysts/Fundamentals
BRTO – The best potential upside in the sector
CCRO – A lower than expected fall in traffic
CSNA – Better performance than its peers, due to having iron ore
ITUB – Multiples lower than its peers
MMXM – MOU with Chinese and the M&A in Corumbá not priced in
PCAR – Lagging, despite good supermarket sales in April
PETR – Should perform in accordance with the Ibovespa
PRGA – With the merger, it presents lower risks than the risks for Sadia
SUZB5 – lagging in relation to its main peers
TCSL – Sale of control brings tag along gains
VALE – Price negotiations should result in a lower than expected price decrease

Source:IXE & Banif, 01.06.2009

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, , , , , , , , , , , , ,