Cuba: Investor’s paradise or fool’s trap?
Today's Financial News - Posted April 13, 2009
Obama is making more bold moves today. His latest headline-maker is changes in the laws involving American commerce with Cuba. Some investors are jumping with joy on the news. Is there still time to join the action?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): This is going to be one of those weeks when investors have a shot at making serious money by merely monitoring the headlines and making appropriate news. With Congress taking some time to refill its law-signing pens, Obama is the only one left in Washington to make any political news.
Whether that is a good thing or not is debatable, but plenty of investors do not care. They are already profiting from the headlines.
Earlier today, the president took a major step at refreshing Cuban-American relations when he opened unlimited air travel and money transfers for Cuban Americans to family in Cuba. While the news has been widely expected for weeks (since Obama’s campaign, really), investors in Cuba-related equities are watching their portfolios surge.
Anytime the notion of boosting diplomatic ties with our island-neighbor to the south makes the front page, shares of Herzfeld’s Caribbean Basin Fund (NASDAQ:CUBA) surge. So far today, shares of the closed-end fund are up by well over 30%.
Ay Caramba
Before you go tossing your luggage on the bandwagon, there are some things you need to know. First of all, as a closed-end fund, the Caribbean Basin Fund’s price will react differently than a mutual fund, which many investors often confuse this investment for.
Because Herzfeld does not redeem shares as they are sold, as would happen with a mutual fund, prices are tied to the same liquidity constraints of any other thinly traded stock. With a market cap of just $30 million, there are not many shares of the fund to go around.
That means today’s price surge is more of a factor of low supply, not high demand. The rally will not be a long-lived one.
Also, investors must be aware, the most ties the fund has to Castro and his island is its ticker symbol. The vast majority of the fund’s holdings are in Caribbean Basin-related companies, chiefly in Mexico, the Bahamas, and Guatemala. This is far from a pure play on Cuba.
Over my career, this fund has popped and surged like clockwork on any news related to opening Cuban-American ties. In the days and weeks following each major move, share price trickles back down to where it started.
There are plenty of reasons for investing in this fund, but they have more to do with emerging markets than Cuban-American relations.
If you are thinking about making a move and putting some money into this fund, back off. Shares will be much cheaper in just a couple of weeks.
Next Article: Government Motors: Obama’s latest mistake
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