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Thursday, March 31, 2011

BRICs or BICs or nothing?

Are the BRICS falling out of favor? It looks like it in the next chart.  Returns for the last 6 months of several ETFs are plotted.
PEK=China, INDY=India, RSX Russia, EWZ=Brazil, GSPC= S&P500... Only Russia outperforms...
Do they really?


The next chart shows what happened with exchange rates for the last 6 months...

Russia greatly underperforms, taking all the gains away

BRICs or BICs or nothing?

Tuesday, March 29, 2011

Mantega and the BRICs

Guido Mantega, the finance minister of Brazil became famous when he stated in September of 2010 that "We’re in the midst of an international currency war". This statement was aiming at how countries were manipulating their currencies (lowering) to acquire a competitive advantage in international markets.
What has happened since then?

QE1 and QE2

What has been the effect on the BRICs?

The USD has lost value amongst all BRIC currencies, specially the RUB and BRL.

Was Mantega right?

Sunday, March 27, 2011


Codelco, the state owned copper producer is huge. With 2010 sales of $16 billion, it represents almost 10% of Chile’s GDP ($160 billion in 2009). What should Chile do with it? One thing is to keep it, run it and benefit from it. This alternative forces Chile to deal with commodity price risk. Does Chile really want to bear this risk?
Another alternative is to sell it. How much? Well… P/E ratios in the industry range from 9 -15 times. If we take a conservative 10, then Codelco's $5.8 billion in earnings would turn to $52 to 87 billion valuation. Not bad? People tend to get greedy. According to a study made by Goldman Sachs in 2005 Chile would have been happy to get $26 billion for it. Looking at the price of copper it looks hard to find a better time to sell. If you think the price of copper will go higher, then sell only 10% of Codelco.

Chile spends $10 billion per year in education.  How different would Chile’s future be if we could increase spending by 50% for the next 20 years? 
It is my opinion that investment in education is the only way to break into the developed world.

Wednesday, March 23, 2011

The real unemployment

Unemployment is particularly hard to measure. What to do with those who are unemployed but not looking for a job? Are they "resting" or simply gave up looking after trying so hard?
How about those who are working a job they don't want (perhaps waitresses and bartenders) but need the money? How do we count those who are working part time but would like more hours?
The official un-employment figure, around 9 percent, simply ignores them

The latest Gallup poll published in IBD shows a more comprehensive picture. If we include them, unemployment is closer to 20% than to 9%.

Thursday, March 10, 2011

Gadaffi: Good of bad for oil?

I made this chart based on intrade figures and oil prices (iPath S&P GSCI Crude Oil TR Index ETN ).

As the chances of Gadaffi being ousted are decreasing, oil prices are not. It tells me in the early stages of the crisis, the colonel staying was a solution, now Gadaffi's staying in power is becoming a liability.

Thursday, March 3, 2011

On tainted money

The Financial Times just announced that Sir Howard Davies resigned as the director of the London School of Economics on a donation of £300,000 made by Seif al-Islam Gaddafi, the son of Muammar.

Is that money tainted? Is it immoral to use tainted money for a good cause? Should tobacco companies be banned from making charity donations?

Tuesday, March 1, 2011

Carry trades

With Central banks around the world scrambling to fight commodity price driven inflation, it is a good time to review an old FX trading strategy.

Carry trade is a trade in which a speculator borrows money in a country (and currency) that has a low interest rate and invests it in another country that has a high rate.

Current rates show that an investor could borrow in Japan at 0.1% per year and lend in Brazil at 11.25%.

What should happen?  Interest rate parity suggests that our investor would not benefit because the  the difference in interest rates between two countries should equal the rate at which investors expect the YEN to rise against the BRL.

What has happened?

According to Bloomberg, in 2010, the carry trade of borrowing in dollars and selling the greenback to buy the currencies of Australia, Norway, New Zealand and Brazil returned 11.5 %. That compares with a loss of 2.8 percent using the yen as a so-called funding currency. Interestingly these results have reversed in 2011, with carry trades using the yen gaining 23.8 percent, compared with 2.8 percent in dollar-funded trades.