These guys are sheep... [Archive] - Two Plus Two Older Archives

Wildbill

02-04-2003, 03:11 AM

I just love the great wisdom I see from analysts. They are all cheering moves by some Spanish banks to get out of Latin America. Typical stuff "too risky". Now someone tell me, is it good advice to cheer for this after all. These guys got in all at once in a big frenzy bidding up prices of acquisitions since everyone just had to be there and at first it looked good, money was made in a growth area that needed basic banking service upgrades and they moved out of a slow growth, developed economy. Then times get rough and the riskiness that was always there comes up leading to some losses. The banks react the way analysts seem to coach them in pulling out completely. Now think about that, is that what a rational person would advise??? Buy high, sell low. They did it in classic textbook fashion, yet the move gets cheered by analysts. Unbelievable what passes for good moves these days. When you already lose your shirt and your assets fetch absolute bottom dollar, how can you say its smart to bail out and retrench in a market where you will be lucky to stay level? Its beyond me, the obvious move would have been to buy in when the assets are out of favor (such as now) and if you are going to sell, do it when you can get some reasonable value out of them. Oh well, I bought into Unibanco (UBB) in Brazil a few months ago solid in the knowledge that this is an underserved market with less and less competition as all the fearful foreigners bailed out. Its done quite well for me and I think its a good long-term view. Analysts seem to forget that no matter how bad an economy gets, it still needs banking and there are opportunities to make money in all situations. Risk management is how good and bad banks separate themselves, bailing out at the low point is how really bad banks make their mark.

Wildbill

02-26-2003, 12:44 AM

I like the bonds somewhat, but I think they are just a very short-term play and much of the gain might have been taken out of them. I don't think the spread tightens too much because no matter what Lula does, there will clearly always be a pretty high debt load over the country. Further their problem is that the debt is mostly privately held in country and that is almost a monster in itself, it becomes a quasi-currency in a way. Think about how US T-Bills are sort of the currency of the world, anyone that wants safety over any period of time just parks the money there. Well anyone inside Brazil that wants to sit on the sidelines for any period of time often finds themselves in the governments contracts. Even worse, many of these contracts aren't bonds per se, they are more like legalized bets on the movement of currency. In all its not an easy situation to clearly describe, but I and a few people I work with have done some first-level research on it.

The reason I like businesses (stocks) instead is that I sense opportunity in the growth of incomes. I think Brazil has a leader now that while he might like stability, still will push for growth over concerns about interest rates, currency levels, and size of foreign reserves. He realizes right now that the levels of those are bad enough that they hinder growth, but I see a two-year window where those numbers could come back down and once they get to that point he will fight for growth. After all he is a labor guy. To those ends what will do well are things that can benefit from solid growth, not things that benefit from interest rate convergence or risk reduction, precisely the things that have been driving bonds. Even worse, consider that unless it has a massive and messy situation like Argentina, its likely that any "crisis" would only hold down share prices, yet could pretty much tank its debt. The worries right now are almost all debt related, businesses are poised to grow if they can get the capital so any setbacks for them would just slow their growth.

Brazil is a real solid country, it has so many things to its advantage. Foremost is its "continentinality", the fact that you can truly make a fortune and never leave its borders. If the incomes can pick up and it starts to function on its own without depending on outside capital or entrepreneurs it could be the story of the 21st century. Imagine a country that will eventually pass the US in population, has about the same size as the US, has more natural resources than the US, and has a vast young population. Those are things that if managed right makes the country the place to be. You can keep plowing money in developed economies and hope you catch the few home-run investments, or you can invest in the economy that could be a home-run itself. While there are risks all over, I think the risks are far overstated as the queasy stock markets have big companies quickly pulling the trigger and leaving this potential goldmine just so shareholders don't unfairly pound them should things even slow. Think about it, why should foreign companies that make say 10-20% of their cashflow from emerging economies face 50% declines because they are "exposed to risky economies"? Look at the banks that went into Argentina. Most of them made an investment and when things fell apart there they just let the local bank go under. Yet that tarnished them so badly they lost half their value or more? What am I missing here, do investors really just assume everything the bank did was wrong and they will continue to make mistakes? Some could have been to overvaluation, but I still think investors and especially analysts just don't get it. They don't view businesses right, they use terrible context in judging them. Everything is done in hindsight for the investor, they work far too much like sheep following the hot sector not realizing that hot sectors only stay that way so long. Most of the gain is made in the time running up until and including the moment the sector is called "hot". After that it grows a little more as the sheep pile in, but those that saw the value of it aren't going to buy more after the price is inflated so its true believers become sellers or holders and the sector falls apart.

After all there are innumerable companies in the US that make good money and haven't made a dime outside these borders. Brazilian companies that are solidly positioned could do much the same. View this as a very-long horizon investment. It may take 3-4 years to start seeing much positive, then again a year from now you could see 50% gains in your investment. Hard to say how everything plays out, but undoubtedly you are getting in cheap today.