) -28% in a month...What's going on? Where to start and the
core reasons for the recent run are hardly new themes.
[caption id="attachment_62393" align="alignright" width="280"
caption="Brazil's Bovespa stock exchange in Sao Paulo"]
There is also a thread tied through these factors
as we wrote yesterday, President Dilma's popularity
ratings are at lows (30%)
while her team and party look to be very vulnerable in the 2014
All of this is weighing on the Brazilian Real, which is 16%
lower against the dollar in the current slide.
The BRL slide is a function of the political uncertainty and the
lack of clarity on what they intend to do with both monetary and
The currency is also weak because the economic data coming out
of Brazil suddenly looks recessionary out in the next couple
quarters if there is not a reversal in trend. Yesterday's IP
release was dismal and missed consensus estimates.
Another major factor is one that hits investors closer to home
with disappointing corporate governance and earnings. The
Eike Batista empire was selling billions of Dollars (or BRL) of
stock to investors willing to bet on his commodity and
This all seemed to be part in parcel with the Brazilian success
story and a party that would reap big returns for investors.
The problem is that investors were sold companies who had
levered balance sheets in a declining commodity market, with
underlying assets that either were not as impressive as advertised,
or flat out not worth the money they were sold for.
The Housing sector was a place where everyone followed early
pioneers like Sam Zell into the concept of the greatest middle
class opportunity in emerging markets. The problem that has
befallen investors is that most of the Brazilian homebuilders
traded publically became loss leading, cash burning, receivables
growing entitles with falling margins.
Now a few of them may actually go to zero. Oh and by the
way, with all this bad credit going around the banks look suddenly
Finally, after a 50+% move lower in the market since April 2011
you still don't have a market that is terribly cheap on
multiples. Technically, the IBOVESPA is testing 45K
which is mostly psychological support.
The real support comes near the '08 crisis lows - yes, that's
right, Brazil would be back to the lows of 2008 around 37,500 on
So to sum up, I'm beginning to see panic selling but not enough
yet. With riots escalating and macro flows still a headwind
on tapering, Brazil is still a no touch.