Brazilian Distortion


Brazilian bond distortions have created a fast profit. Yet more Brazilian bond distortions continue to offer potential.

Lessons at this site last month looked at the benefit of investing in Brazilian bonds on April 18 and April 27 2009.

Now there is an even larger distortion creating added benefits that we’ll see in a moment… a big one I did not want to miss so yesterday I instructed my account executive at Jsyke Global Asset Management to buy more Brazilian bonds for my account.

First let me review a really valuable investing fact.

There are basically three types of investors…  very disciplined, short term traders… value oriented fundamental investors… and the losers.

We reviewed the importance of this knowledge at the recent Jyske Global Asset Management Seminar in Naples Florida.  Here I am with the other speakers at that seminar.

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Speakers at the Naples seminar discussing prospects of the economic future.  Left to right: Samuel Rachlin,  Rich Checkan, Steve Blumenthal, Joe Cox, John Mauldin, Gary Scott, Lars Stouge. Thomas Fischer Moderating.

The 115 delegates reported they enjoyed listening to what we had to say and…

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talking among themselves during the coffee brakes and at meals.

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Steve Blumenthal and John Mauldin really focused in their speeches on the importance of  discipline for short term traders.

I focused on value… fundamentals and why they now are in a position where it makes sense to borrow dollars to invest in Brazilian bonds.

One reason is the growing debt in the USA.  Here is a picture from USA Today that shows the US public debt that has grown 12% in just the last year.

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Another fundamental is the long term, steady decline in the US dollar as shown by  this chart from Grandfather.com.

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Based on these ideas and those presented in the April 18 and April 27 lessons we looked at why Brazilian bonds made good sense in the LONG TERM.

Sometimes we get lucky though in the short term… as we have now.

Brazilian bonds have made a sudden jump up!   Those who have invested in them have made as much as 50% (in US dollar terms) this year.

Yet the distortion we’ll review below shows how there is even more dollar denominated profit potential ahead.

Last week the Brazilian central bank lowered key interest rates to 9.25%.  This will likely send the price of  Brazilian real denominated bonds up.

The central bank has stated that there could be more rate cuts, but they will be smaller.

This is positive news plus Brazilian inflation has declined to 5.2% from 5.53% in April 2009.

When you take into account the high interest of the real, the rise in value of bonds and the rise of the real you can see the potential.

Brazilian real bonds have risen nearly 30% since the beginning of the year…  in terms of Euro!

This is where there is another huge distortion.  The real has not risen anywhere near this much versus the dollar.

The charts from finance.yahoo.com below show the distortion.

In the last three months the US dollar has dropped from $1 = 2.30 BRL to $1 = $1.97 (- 14.3%) versus the Brazilian real as this chart shows.

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In the last three months the euro has dropped from 1 euro = 3.05BRL to 1 euro = 2.60 BRL (-13.5%).   This correlation of the euro and dollar would seem normal except…

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as the chart below shows, the euro has risen from $1 euro = $1.28 to 1 euro =$1.40 a 9.27% rise versus the US dollar.

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In addition the Brazilian central bank has had to intervene several times in recent months to avoid the Brazilian real being too strong against the euro.

Traditionally the real has had a strong correlation with the dollar but the recent weakening of the buck versus the dollar has not spilled over into the Brazilian real.

In other words. The real is up against the euro almost 10% more than against the dollar.  This is called a cross rate distortion and means that one of two things is likely to happen.  The dollar will rise versus the euro or  the dollar will fall versus the Brazilian real.

Given the fundamental US fiscal weaknesses that could push the dollar down, I am bullish on the real rising more versus the dollar and this makes me bullish about Brazilian real denominated bonds.

Always remember the basic rule though is to never speculate more than you can afford to lose.   A US dollar – Brazilian real sandwich is worth discussing with your portfolio manager or adviser now but could creates losses as well as profits.

I have not leveraged my Brazilian bond investment. Based on this data I instructed JGAM to increase me Brazilian bond holdings.

If you are using Jyske Bank, and are a non US citizen or resident, or a US citizen living abroad, you can simply have the bank purchase Brazilian bonds and lend you the funds (within the bank’s loan to asset restrictions).   Non US citizens contact Rene Mathys for more details at mathys@jbpb.dk

US citizens should contact Thomas Fischer at fischer@jgam.com

If you are a US citizen resident in the US and have an advisory account with JGAM, they may not be able to buy Brazilian bonds for you.  They could  buy the US traded ETF “The WisdomTree Dreyfus Brazilian Real Fund.” (BZF)

Regards,

Gary

Join us  July 24 to 26, 2009 in North Carolina for our next International Investing and Business seminar.

One benefit of these seminars is talking to an overseas banker.  Here I am at the Naples  seminar  with my account executive Anders Nielsen.

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Thomas Fischer will join us for the July North Carolina course. Here is Thomas speaking to our delegates at a previous course.

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We are enhancing the portion of the course on how to earn with your own web based business.   My webmaser David Cross will join us at the seminar.

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We always try to have the seminars in great surroundings as well. Here was our view at the Naples seminar.

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We’ll have the July North Carolina course at the brand new Hampton Inn in West Jefferson.

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and at our farm.

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Here is a view from the Hampt0n Inn.

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Join us  July 24 to 26 in North Carolina for our next International Investing and Business seminar.


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