Archive for the ‘LATAM’ Category

A Brief Global Macro View on the World’s Markets

October 12th, 2009 Michael McDonough Comments off

This is a very short global macro overview of today’s markets. I do not recommend any of the trades mentioned in this report, but hope they help reinforce your own view or help you generate some news ideas.

Monetary policy around the globe remains easy, providing ample liquidity and room for credit growth. Additionally, fiscal policy remains expansionary, and in some regions the full benefits have likely not yet been realized.

In the U.S., I believe we’ll discover that growth returned in the third quarter this year, primarily due to a turning in the inventory cycle (I will go into more detail on this topic in my Economic First Look when GDP is released). While the U.S. is only just returning to positive growth, some developing nations never experienced contraction or have already returned to growth mode. The trend of developing nations outpacing the developed world should continue and provide some potentially profitable investment opportunities, especially in Brazil and China.

But the punch bowl won’t last forever. An eventual resurgence of inflation and massive government deficits will eventually lead to higher rates and limited room for new fiscal stimulus. In fact, on Tuesday the Australian central bank surprised the world by announcing a rate hike to 3.25% from 3.00% on the back of perceived economic strength. Nevertheless, it will take some time — six to nine months — for other governments and central banks to catch up to Australia’s policy stance, leaving markets around the globe ripe for further appreciation.

As market conditions remain favorable for asset appreciation over the next six to nine months, developing nations — especially Brazil and China — will continue to outpace developed nations — especially the U.S. — in terms of economic growth and equity market performance. Therefore, you should consider long positions in ETFs based on the countries; those include iShares Brazil (EWZ) and iShares FTSE/Xinhua China 25 (FXI) .

Both of these countries have strong consumer stories:

* In Brazil, personal consumption has been leading its recovery. The country experienced 2.1% sequential growth in consumption in the second quarter, and the metric is generally anticipated to remain robust into 2010 on the back of easy monetary policy. The Brazilian unemployment rate has already fallen to 8.1% in August from 8.8% in May, and it’s widely anticipated to move between 7% and 8% over the coming months.

* In China, if you are a believer of the burgeoning middle-class story, you may want to look at companies like Zhongpin (HOGS) . Zhongpin is a Chinese meat and food products company, specializing in pork products. Additionally, expected increases in the caloric intake of the Chinese population could provide some opportunities in the global fertilizer and agricultural sector. I view China as a more volatile Brazil, with higher return potentials but also much more downside risk.

Additionally, I am bullish on the currencies of commodity-producing economics, including the Australian dollar, Brazilian real, Mexican peso, Chinese renminbi and Korean won. At the same time, I believe the Japanese yen, which has experienced significant appreciation over the past several months, may be overvalued due to deteriorating fundamentals. One way to play this view is taking a long position in Proshares UltraShort Yen (YCS) ETF.

Domestically, I am somewhat overweight on the U.S. technology sector via ETFs or Apple (AAPL) as a single name. It will also be interesting to monitor whether Verizon (VZ) is able to end AT&T’s (T) monopoly on the iPhone. Apple’s contract with AT&T is set to expire in June, and analysts are mixed over whether Verizon can expect to add the product to its line.

I am still somewhat bearish on the U.S. housing sector as foreclosures and mortgage delinquencies across all types of loans continue to weaken the sector. Moreover, the first-time homebuyer tax credit program is set to expire at the end of November; that incentive doubtless had an impact on recent home sales. Continued weakness in the housing sector may place some downward pressure on U.S. REITs.

The show won’t go on forever. A return to growth coupled with fears of economic overheating will cause central banks around the world — likely starting with emerging markets that have already returned to growth — to tighten monetary policy. While at the same time, developed nations will face the repercussions of swelling budget deficits. In Brazil, like in the U.S., monetary policy is expected to remain unchanged for most of 2010, which should provide further support for domestic assets.

In the near term, the biggest downside risk to this investment the possibility that central banks may tighten monetary policy prior to current expectations. But tightening is inevitable; rates in the U.S. will not remain at 0% forever. Once it becomes clear that central banks are approaching a tightening cycle, investors should consider taking profits on their equity positions. Ultimately, higher budget deficits in the U.S. combined with potentially momentous health care reform could lead to higher taxes and rates, coinciding with a period of subdued growth and elevated unemployment.

For more please see my column on


Is a Falling Greenback Leading to Smooth Sailing for Shippers?

September 18th, 2009 Michael McDonough Comments off

I have received several inquiries regarding the recent divergence between the BDI and my dry bulk shipping index (DBSI), and thought I should touch on the subject.  First and foremost I believe that a large portion of the divergence can be explained as a US dollar story.  Also, recent weakness has been mostly isolated to larger capesize vessels, which means shippers with low or no exposure to that sector have been somewhat buffered.  Prior to the global financial crisis, a weakening dollar helped lead to an unprecedented surge in commodity prices and shipping rates, this had a direct positive impact on shippers’ asset values and rates.  As the crisis hit investors around the globe became more risk averse and flocked into US government debt.  This liquidation of risky assets caused a massive retrenchment in commodity prices and a significant rally in the US$.  Now however, as investors again grow less risk adverse, the value of the greenback has begun to depreciate, and with it we are again seeing a rally in commodity prices and flows back into riskier assets.  However, unlike the prior example we have not seen, and are unlikely to see, any significant appreciation in shipping rates over the near-term, more on this later.  But, speculation over what some believe may be a V-shaped recovery have potentially over-valued some assets that could experience a possible sell-off, leading to a interim increase in risk aversion and an appreciation in the dollar.  Don’t get me wrong, I do believe the overall global economy is improving, however, I feel it will be at a more measured pace with some volatility, and in this context I believe some debt spreads and equity markets could be overvalued.  This is especially true in the shipping sector.

Source: Bloomberg & Capital Link

Source: Bloomberg & Capital Link

The chart below overlays my DBSI with the inverted US$ index, and as you can see the correlation over the last few months has been very significant.  This relationship also explains why the DBSI has largely been ignoring declines in the shipping rates.  At least over near-term, it appears that a bet on the sector essentially equates to a bet against the US$.  As I mentioned yesterday, another reason the temporaneous breakdown in the relationship between shipping rates and the DBSI is shippers’ higher proportions of fixed long-term contracts, reducing the sensitivity to the BDI, however, this also limits upside.  In conclusion, an appreciating greenback will only move shippers’ stocks up so far, without a corresponding increase in shipping rates, which is not on the horizon.  Therefore, with the bleak outlook for shipping rates combined with the potential for what I believe could be another market correction before growth returns on a more measured pace, I would be hesitant to place any long positions on the sector at current values.

Source: Bloomberg & My Calculations

Source: Bloomberg & My Calculations

As an aside:  FBR Capital Markets, this morning published a bearish report on the dry bulk sector due what they believe will be relatively few order book cancellations.  The company said, “After our recent meeting with the largest and most advanced shipbuilder in China, China Shipbuilding Industry Corporation (CSIC), in Beijing, China, we reiterate our Underweight position on the dry bulk industry. CSIC confirmed our thesis that there will be fewer-than-expected order book cancellations.”  My DBSI returned some recent gains yesterday falling -1.1%.  The index is still realizing a weekly return of 9.1%


Brazilian Iron Ore Exports Drop in May

June 5th, 2009 Michael McDonough Comments off
A recent release by Brazilian officials showed that iron ore exports fell to 15.3mn tones in May, a drop of 35% from last month and a 2009 low. This is likely due to diminishing demand by the country’s largest custom, China. A note released by Goldman Sachs confirms this theory stating, “Heavy rains in the north of Brazil and port congestion in China could have had a negative impact on Brazilian iron ore exports, but the main reason … is likely lower iron ore demand from China due to high steel and iron ore inventories.”

Over the past several weeks, the shipping industry has been experiencing a strong resurgence in activity primarily due to Chinese iron ore imports. However by the end of this week those gains began to reverse, as indicated by a drop in the Baltic Dry Index (BDI). I anticipate the BDI will continue to moderate as Chinese demand continues to diminish, and an over supply of new capacity hits the shipping sector. This will likely add risk not currently priced into equities trading within the space. Companies that have high leverage ratios due to over expansion will be most suscetpible to any downward pressure to shipping prices, while companies with limited expansion plans and low leverage will be better position to weather the coming storm.

For a more detailed analysis please see my column on international trade at


The Baltic Dry Index Revisited

November 8th, 2008 Michael McDonough 1 comment
I have been receiving a significant amount of email regarding an old entry I wrote back in March 2008 regarding the Baltic Dry Index (BDI). Back in March the BDI was recovering for an interim low it experienced in January on fears of a global economic slowdown, however, since then the situation has become far worse. The BDI is now trading at levels not seen since 2001. To help put this into perspective a recent article by “The Independent” noted that in the beginning of June the total cost of a shipment of coal from Brazil to China would have totaled USD15mn per voyage compared to USD1.5mn currently. At the same time, the article noted that the daily cost of chartering a capsize bulk carrier during this cycle’s peak amounted to USD234.0K vs. USD5.6K presently. This is a drop of around 98%!
The Baltic Dry Index’s recent plunge
Source: Bloomberg

Now on to what is important… Why has this happened? Unlike the drop the index experienced earlier this year, based primarily over concerns of a global economic slowdown; the current plunge also takes into account the ongoing liquidity crisis and commodity deflation. The shipping industry relies heavily on an instrument called “Letters of Credit” (LC), which is a guarantee issued by a bank that the buyers funds will be transferred to the seller at the completion of the transaction (i.e. traded goods properly received). As liquidity tightened around the world so has the issuance of these instruments, further slowing global trade. According to Trade Finance Magazine to cope with this, the market has begun to see a resurgence in export credit (i.e. the seller issues loan to the buyer via an export credit agency), but as the magazine pointed out this is a “relatively slim corridor”, and holds significantly more risk for the exporter compared to a traditional LC.

As if this alone were not bad enough it would appear that deflation in commodity prices has caused many companies to begin using up raw material inventories rather than importing new stocks. This is basic economics, why buy something today that will be cheaper tomorrow? Nonetheless, these industries will eventually run low enough on inventories where they will be forced to purchase more, which should put some upward pressure on shipping costs.

The CRY Commodity Index has also dropped significantly
Source: Bloomberg

If prolonged this ’suspension’ in global trade will have significant adverse effects for export oriented economies, and increase the likelihood of further reductions to 2009 growth rates . Nonetheless, I do believe that as companies run low on inventory and as global credit markets continue to unlock we will see a stabilization and marginal recovery in shipping costs. However, it is unlikely we will see BDI levels anywhere close to those at the beginning of this year anytime before the end of this decade. In the short-term yet another piece of negative news for the global economy…

As an aside I created a monthly market cap weighted shipping index starting in May 2005 to compare against the BDI. I used the following companies for the index 1) AP Moller – Maersk 2) Mitsui OSK Lines 3) China Shipping Development Co 4) Nippon Yusen 5) Kawasaki Kisen Kaisha 6) Evergreen Marine Corp 7) Orient Overseas International 8) Neptune Orient Lines 9) Hanjin Shipping Co. & 10) CSC Nanjing Tanker Corp. Maersk alone makes up roughly 50% of the total market vap of the index.

Global shipping companies could continue to face downward pressure until the BDI begins to moderate.
Source: Bloomberg


A Quick Look at Global Sub-indices (& An Aside on China)

September 14th, 2008 Michael McDonough Comments off
A while back I created an excel file that tracks the conditions of global sub-indices. Essentially, I took over 600 sub-indices from around the world and I broke them out by best and worst performing over the past 6 months, P/E and P/B ratios, and dividend yield. I extracted the 15 best and worst performing indices from each of these categories and consolidated them in the chart below . I am eventually planning on using this data to look at global trade ideas or to spot mis-pricings between markets. All in all I extracted this data form Bberg last week and I hope you enjoy the data. I will follow up with a more detailed analysis on markets that may look attractive after I conduct further research.

As an aside, given the recent economic data out of China (inflation, IP, exports, etc…), I anticipate the government is closer to moving towards a more accomodative monetary policy. The shift will likely include reductions in reserve requirements and an easing of lending standards. It is also possible, but unlikely at this point in time, that we could see a rate cut before the end of 2008. Any action by the government to stimulate the domestic economy should have positive effects on Chinese markets. I currently hold an upward bias towards some of China’s housing, health care, and financial names. (Please see earlier posts for more details).

Top and Bottom 15 Global EQ Sub-Indices by 6M performance, PE, PB and dividend yield

*Source: Bloomberg