Brazil—not for the faint of heart

Beset by scandals that could reach as high as the presidential office, suffering from an epic drought, low oil prices, high inflation, a declining currency and a negative economic growth rate, the world’s seventh largest economy could be an interesting long-term investment but not for the faint of heart. No question about it, Brazil is a basket case right now. Dilma Rousseff, the two-term Brazilian President and former head of the state-owned energy behemoth, Petrobras, is embroiled in scandal. So far she has managed to elude prosecutors, who are pursuing 28 different investigations involving 54 politicians. Present and former Petrobras executives, including heads of both Chambers of Congress, former ministers, an ex-president, as well as the top members of President Rousseff’s ruling Worker’s Party are all involved. The multi-billion dollar kickback scandal involved funneling money through Petrobras and into the pockets of politicians and the election coffers of the Worker’s Party from 2003-2010, (when Rousseff was president of the company). She maintains no knowledge of the scheme, however, three out of four Brazilians think she is lying and 44% of the population disapproves of her administration. Business and consumer confidence are touching historic lows while the Brazilian currency, called the Real, has depreciated 40% against the dollar. Brazil is also suffering from a wide-spread and lingering drought that is hurting their vast agricultural export sector (3.5% of GDP and employs 15% of the labor force). It gets worse. The country’s main source of energy is derived from hydroelectric plants, which depends solely upon water to drive their industrial sector (23% of GDP). As a commodity-rich country, the decline of...

The European Central bank delivers

Today Mario Draghi, the head of Europe’s Central Bank, announced new steps in an effort to lift the EU from economic malaise. Investors wonder if it will be enough. That’s not unusual. There were many doubting Thomases in this country when the Fed first launched its quantitative easing program back in 2009. Japan, which is in the second inning of its stimulus program, also has its share of detractors. At first blush, the expanded program of stimulus includes an asset purchase program of both private and public securities of up to $60 billion Euros ($69 billion) a month through the end of September 2016. That amounts to well over a trillion Euros in new stimulus. The markets were expecting roughly half that much. What makes the move even more impressive is that the ECB prevailed in the face of heavy opposition from Germany’s Bundesbank. The Germans argue that bond bailouts like this only encourage spendthrift countries to postpone economic reform. Greece is just one such country. Greece is scheduled for national elections this weekend and Syriza, a popular anti-austerity party, is expected to win. The ECB’s new stimulus program appears to include Greek debt but under certain conditions, most likely linked to Greece’s willingness to continue economic reforms. Unlike our own central bank that has a dual purpose of maintaining employment and controlling inflation in this county, The ECB has only one mandate—inflation. They have failed miserably in achieving their stated goal of an inflation rate of just under 2% annually. Last month consumer prices actually turned negative, falling 0.2 percent. What concerns European bankers and governments alike is...

Bad News is Good News

Both here and abroad the economic data is indicating that the world’s economies are contracting. Yet, global stock markets are rising. Once upon a time that would have been a contradiction, but not today. Over the past year the financial problems of Europe have been well-publicized. Starting with Greece, most of the southern tier of European Union countries have been mired in recession, high debt and declining exports. Those problems have infected the entire continent, resulting in an EU-wide recession, but that is old news. Over in Asia the story is the same. China, the economic engine of that region, has also experienced slowing growth, reducing the prospects for all its neighbors in the process. And now these problems are coming home to roost here in the United States. Factory orders in the U.S. declined in June for the first time since 2009. The nation’s manufacturing output has been one of the drivers of our own recovery but weakening demand from overseas, coupled with declining currencies in our export markets have resulted in a slowdown in U.S. output and exports. It is not just manufacturing, overall economic numbers coming out of most sectors of our economy have shown a gradual slowdown. Investors are not only taking this bad news in stride but are actually bidding up the stock market because of it. Readers only have to look back over the last few years to see the same kind of phenomena occurring over and over again. It usually occurs during the summer months and has a decidedly positive impact on the stock market. The answer lies in the continued government...

Clients Last? Welcome to Wall Street

Sam Rogers, head of trading: “And you’re selling something that you “know” has no value.” John Tuld, CEO: “We are selling to willing buyers at the current market price.” John Tuld: “So that we may survive.”                                                             “Margin Call” If you ever wondered where you stand on Wall Street, the op-ed opinion piece in yesterday’s New York Times is a must read. The fall out from the words of a 12-year veteran of one of the world’s most prestigious investment firm is resonating around the world. It is not necessary for me to identify either the firm or the writer, since just about everyone now knows who I am talking about it. Yesterday, my inbox was deluged with readers who forwarded me the piece. Most readers are aware that I have a huge beef with the ethics on Wall Street and what I see as the ‘customer comes last’ attitude that is prevalent within that sector. As has happened in the past, I’m sure that after this column runs I will receive a flurry of hate mail from those in the financial community, who believe I am attacking them personally. I’m not. Most individuals in this business are decent folks who do care about their clients –when they are allowed. Unfortunately, they work for firms that cannot put the interests of their clients first or even in the top ten of their business objectives. These firms are just too big, too short-term and too focused on next year’s bonuses to afford the luxury of putting their clients first. Now, I know for the most part I am preaching to...

Gas Prices Going Higher

Over the last week a flurry of price forecasts for gasoline have reverberated through Wall Street. Some experts are guessing that pump prices could easily top $4.00/gallon and possibly higher by Memorial Day this year. Their forecasts are being extrapolated from the present price of gasoline which averages $3.52 per gallon. That is high for this time of year, since February is usually a period of low gasoline demand. You might think that this year is a bit different since the mild winter and absence of snow throughout much of the country might bolster driving. But demand nationwide is down to 15-year lows. What has propped up oil prices so far this year is continued instability worldwide. The financial crisis and subsequent recession in Europe, which should have reduced energy demand has been counterbalanced by events in the Middle East. The real culprit in the oil patch appears to be Iran. The world wants Iran to cease and desist developing nuclear weapons or else. In response, Iran has been threatening to close a key oil avenue through the Strait of Hormuz, if the U.S. and the EU deliver on their intent to apply economic sanctions to their country. As a result, the price of oil has been flirting with $100/BBL level over the last few months and is presently trading above $102/BBL for West Texas crude. The threat of higher oil prices if Iran were to embargo Europe or the U.S. is real. Iran boasts the world’s fourth-largest proven oil reserves and the world’s second largest natural gas reserves. Middle East tensions are nothing new. The oil market periodically...