Home > Featured Video > Commodities Meltdown: Is Brazil’s Bovespa Going Bust?
 |  Add to Technorati Favorites| Follow Us on Twitter! Follow us on Twitter

Commodities Meltdown: Is Brazil’s Bovespa Going Bust?

Today's Financial News - Posted October 20, 2008

Many believed economic development in Brazil to be on solid footing. But with commodities and oil prices crashing, that security may be crumbling away. Global economist Andrew Gordon explains where to find hidden profits.

Watch this video…

by Laura Cadden

Baltimore - (TFN): Of the “BRIC” economies (that’s Brazil, Russia, India, and China!), Brazil is often considered to be the most solid in the current crisis. Until June of this year, Brazil’s Bovespa was indeed the best performing major equity index in North or South America. Now—down 51 percent on a currency adjusted basis—it’s the worst! Are the days of wine and roses over for Brazil?

I’ve invited Andrew Gordon of Red Flag Insider to provide his expert opinion. Andy, what do you think actually accounts for the volatility right now in Brazil’s market?

Andrew Gordon: Well, Brazil is a big commodity producer, particularly in agricultural commodities: soy beans, orange juice, sugar. It also is a big oil producer. The economy is export-driven.

So what’s going on today, this big global slowdown, has really impacted on Brazil and will continue to. There’s no way getting around it. Brazil had a lot of things going for it—but it’s a matter of “live by the sword, die by the sword”. Their economy was thriving on the back of soaring oil prices, commodity prices. The economy was going great. There was a lot of spending. The middle class was very solid and thriving.

We know what it feels like because we’re the “other end” of it here in the U.S. One could say that we’re the cause or one of the main causes of Brazil’s troubles. We’re a link. We’ll continue to be linked.

****View the video here…

Laura Cadden: You’ve written that the country’s best oil reserves should sustain the economy. Well, we have Petrobras (NYSE:PBR) trading at the lowest point its been since February of 1999, I think. Do you still believe this to be the case?

Andrew Gordon: Yes, but I have to add a qualifier to that. And that is, in the long term, it is going to be a huge asset for Brazil. They have tremendous offshore oil reserves. They have a couple of new discoveries.

The thing is that they have been made in deep water. It’s not going to be cheap to get to the oil and these reserves. At the price of oil right now [we conducted this interview on October 8), it’s still a very profitable business for Brazil. If you see oil go below $85, I think that’s pretty close. Below $75, that’s the threshold where they may not get the investment necessary to develop those resources.

The problem now is it’s still profitable, but they can’t get the investment necessary because of the tight credit that exists. So there’s that side of it for Brazil.

So they’re having their problems. Their oil reserves will serve them very, very well in the long term. There’s no life saver here. They’re not getting rescued from their oil underneath the ground that they still haven’t produced. It’s not benefiting them right now.

Better for it to be under the ground while price is going down. When price starts to go up, they’ll produce it. They’ll do very fine.

Laura Cadden: Let’s move on to raw materials because of course about half of the Bovespa is made up of raw material producers. Vale (NYSE:RIO) for example, the world’s biggest iron ore producer, it’s at its lowest price level in 14 years. What do you think is going to happen with this sector?

Andrew Gordon: Commodities across the board have gone down. Brazil is very tied into the global demand for commodities. You have to remember that just a couple months ago, maybe more, maybe three months ago, Vale negotiated a 96 percent increase in iron ore prices with China, by far its biggest buyer.

I believe that agreement is still in place—although if the market no longer supports that kind of price, it’s going to be interesting: If and when China will step up to the plate and say: “Hey, I’m your biggest buyer. I don’t want to buy your iron ore at premium prices. We’re going to have to renegotiate.”

Since this impacts half of the stock market, is terrible. It’s not only current sentiment. Basically, the sentiment is: “Things are bad now and it’s going to get worse before it gets better.” With that sentiment you’re going to see the market probably fall a little more

Laura Cadden: You think it’s going to continue to go down at least another few months?

Andrew Gordon: I think it’s going to continue to go down. I don’t see the global growth story changing. I don’t see global growth turning around on a dime in the next few days. It’s just not going to happen. It’s going to be awhile.

The global recession, the U.S. recession, the European recession, what’s going on in China, it’s all now deeper than we had envisioned just a month ago. Every day you wake up, and things are deteriorating rather rapidly.

So, yeah, I think it’s going to go on at least a few more months

Laura Cadden: So are there any recommendations you’re providing to your readers regarding Brazil? Are there plays perhaps that you’re considering, or trades—puts on Petrobras, things like that?

Andrew Gordon: A put on Petrobras, one of my favorite companies! It sounds to me it has that sacrilegious ring. I’ve looked at Petrobras and it has been trading way down. If you had put a put on this a month ago, you would have made out quite nicely.

But I’m really not a big believer in chasing companies down. Not companies that have gone down substantially like Petrobras has already.

I’ve looked at their weekly chart just this morning and I saw that the stock is resting on its 200 week moving average. That’s a big support level for this stock. Conceivably it could provide support. The stock could bounce up from there.

If it doesn’t, if it blasts through this support, it keeps heading down, to me that’s a good indication of a continuing negative sentiment and of a commodity market that’s not going to support the price of the company.

On that basis I would seriously consider a put, but you’re going to have to wait a week or two to see that support level clearly overcome.

Andrew Gordon writes for the free e-letter, Investors Daily Edge.

****Make sure you sign up for our FREE TFN News Feed for breaking news, special reports and new financial videos. Subscribe to our feed by email. Subscribe to our feed in your RSS reader.


Next Article: Market winner: Arbinet (ARBX) makes big move

Related Articles

 |   | Add to Technorati Favorites | Follow Us on Twitter!

Posted by Laura Cadden · Filed Under Featured Video, Podcast, Videos 

Be the first to leave a reply.

Your comments are welcome