Betting On Brazil

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Five years later, he also gave early warning about the coming drop in U.S. home prices. Yet with all the talk of bubbles across the globe, there is one hot market Shiller likes: this week’s Global Bull Market Alert pick, Brazil.

"Brazil is the country of the future… and always will be." Much has changed Charles De Gaulle’s wry observation. Indeed, Goldman Sachs has anointed Brazil as one of the fast-growth BRIC economies — one of the top four emerging economies it expects to become a leading global power between now and 2050.

Brazil epitomizes the rollercoaster that has been Latin America’s economic fortune over recent decades. Half a century ago, Brazil was one of the most rapidly growing economies in the world. It experienced another growth spurt in the early 1970s. Brazil grew a China-like 9.8% a year on average between 1970 and 1974. But through much of the 1980s, Brazil grew by less than 1% a year. In the decade 1986-96, the annual average rate of inflation for Latin America as a whole was more than 180%.

Over the past five years, Brazil has gotten its economic act together. Inflation is now moving firmly into the low-single digits and Brazil’s falling external debt is allowing it to get back on its financial feet. Rapid economic growth in China has been driving demand for key Brazilian exports, such as iron ore, alternative fuel and soybeans — swelling corporate profits. The inflow of dollars from the commodities boom has allowed Brazil to pay off foreign creditors early, including $15.5 billion to the IMF. As a result, the IMF expects the Brazilian economy to grow 4.4% this year and 4.2% in 2008.

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And while the rest of the world is worried about rising interest rates, Brazil is cutting them. Just last week, the central bank lowered rates by half a percentage point to 12%, the 16th rate reduction in the past 21 months. Foreign investors are also benefiting from the strength of the Brazilian real. Since the start of the year, the real has gained 9% against the dollar. That increase boosts returns for U.S. dollar investors, because every Brazilian real earned can then buy more dollars.

"Never in the economic history of Brazil have we had the solid fundamentals we have now," exuded Lula da Silva in a recent interview. "It is living a magic moment." As Robert Shiller summed up last week in The Wall Street Journal, "Things are really looking good." Inflation is stable, the currency is strong and there is wide popular support for the government. Citigroup, Merrill Lynch and UBS agree, recommending that investors be "overweight" in Brazilian shares.

How best to play Brazil’s impressive recovery? Buy the iShares MSCI Brazil Index (EWZ) at market today. Place your stop at $49.00. A word of warning: the Brazilian market tends to be a wild ride, even in the best of times. When markets get nervous, it tends to sell-off, hard and fast.

PORTFOLIO UPDATE

Our portfolio held up well in last week’s bout of nervousness. Markets should calm down and settle into their normal restrained summer pace over the next few weeks.

National Bank of Greece (NBG) went ex-dividend on June 1 for a payment of 27 cents per share. The bank is commencing the payment of the dividend today, June 11. The stock was also recommended in a recent issue of Business Week with a target price of $21 — almost double its current level.

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Also, adjust your stop in LAN Airlines (LFL) to $70.25.

P.S. Join me at the 29th Annual Money Show in San Francisco
I invite you to sign up for this year’s Money Show, July 26-28, 2007, at the San Francisco Marriott located in the heart of the city’s picturesque downtown. Join over 50 of the country’s premier policy analysts, advisors, and money managers who will share their best strategies for taking advantage of economic, political, and market opportunities to grow your investment assets. You can choose from over 150 educational workshops and 15 panel presentations. The show also features a state-of-the-art exhibit hall with more than 125 of the finest financial companies in the country displaying their cutting edge products and services. For complete details or to register for free admission, call 800.970.4355 (be sure to mention priority code #007384), or visit: The Money Show San Francisco’s Home Page

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Overall, our Global Stock Investor portfolio had a strong week. Six of our seven stocks were up and four of our picks also hit record highs. The big news of the week was that the Chinese stock market has begun its long-expected correction. On Monday, the Shanghai Composite Index fell 8.3% to 3,670.4, its largest one-day decline since Feb. 27. So far, the damage has been limited to the domestic Chinese market. But remember, financial contagion is not rational.

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