Monday, August 8, 2011

Bottom-fishing time? No. We love being brazilian.

Regarding bottom-fishing:

This weekend a french friend of mine who actually lives in São Paulo visited Rio. We went out for brunch on saturday morning and it was a good 4-5 hour chat about business in Brazil, entrepreneurship and, why not, markets. All overlooking beautiful Ipanema and Leblon beaches. My friend worked as a derivatives trader for a german bank and is now ahead of his own capital markts advisory business in Brazil.

He defended, as an european, allocating capital into US dollars and Euros in some bank in Germany or the US. I countered with my already published view that somehow this dogma is changing slowly and the reserve currency status is being challenged.

I moved into talking about my financial homeland and thanked my parents for being in Brazil at exactly this time in history. Why?

For a very simple reason: We, brazilians, are paid a very generous 12.40%/year risk-free rate in local currency (~6%+ real interest rates). That means that our bar is raised THIS high when it comes to investing and taking risks. It means we should be VERY patient and really look for opportunities before allocating any risk.

An investor with The Tail Chaser Fund (say he would want to pay 2% in management fees to read these badly-written lines that justify my trades, and 20% of his profits!) could still reap 3 to 4 times more in Brazil compared to an american or european 10-year fixed-rate investment. Of course, different currency.

Not that The Intrigued Trader is any good, but if he just sat down and waited, the chance of outperforming funds in USD or EUR in those 10 years would be very, very high.

Another friend of mine who made some big bucks working hard in the real economy business emailed me today asking if these were 'buying times'.

My reply was as follows:

"It is early to buy.
There are very interesting prices for many securities (here I talk about brazilian stocks), but I will only make a move in stocks when the Central Bank signals rate cuts and there is a global move into cutting rates and pushing forward more fiscal stimulus to 'save it all', etc.

I believe that with the markets so screwed world-wide I still need to see economic activity showing evident signals of deceleration/recession (Europe/US/Japão), a fall in commodities to reduce global inflation...

And consequently rate cuts where there is still room for such...

For now it is only CDI (float) or fixed-rate long-term bonds (duration of 5.4y, NTN-F 2021)"

So... Markets have been pricing in this deceleration in activity, but we're only in risk-aversion mode and not yet in "economic contraction mode".

Markets are pricing some things in, but not everything in.
As regular readers know... I am quite a realist, not bear.

Good luck to us all.

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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