A Bull Market?

Three years ago stock markets took off. Bull markets usually last less than 4 years. Are we nearing the end of this bull's run? Maybe but, then again, maybe not. Between late April and early October of last year, the S&P 500 lost 19.4%. A market becomes a "bear" when the drop is 20% or more. Measured by closing prices, we didn't have a bear market but if you look at the index during the trading day, last October 3, the S&P 500 dropped more than 20%.

There are some other signs that this year's run-up might be the first year of a new bull market rather than the fourth year of the 2007 bull. One is that shares of technology firms, small companies, and consumer discretionary stocks do best at the beginning of a rally. That's true now. Typically, consumer staples and health care and utilities are leading the market in an aging bull market. That's not the case now.

The biggest gains in a bull market are generally made in the first year of a rally. Since World War II, the gain in the first year of a bull market has averaged 38%. Since October 3, the S&P 500 is up 27%.

If you were ever tempted to think that a bull is a bull, disabuse yourself of the notion. There are different kinds of bull. There are cyclical bull markets and secular bull markets. The former accompanies a single economic expansion. A secular bull market encompasses both bull and bear markets and can last more than a decade. Historically, at the beginning of a secular bull, P/E ratios are in single digits; that's not the case now. The last secular bull market ran from 1982 to 1999.

There are also "non-economic rallies" (NERs). NERs are rallies following a bear market that don't coincide with recessions. The historical record since World War II tells us NERs are shorter and more muted than a bull market. On average, they last 31 months (compared to over 3 years) and the median cumulative return is a bit less than 62% (compared to the nearly 102% median return of a bull market when the economy is coming out of recession).

What kind of bull is this?

Has Brazil got it all worked out?

The subject of Brazil's economic success came up the other morning in Economex. For those interested in following up on the discussion, here's a well-informed, succinct article by Jerry Haar on the Brazilian economy. It appeared in the Latin Business Chronicle.

Tuesday, March 20, 2012

Perspectives

Brazil: A Cautionary Note

The irrational exuberance over Brazil must be tempered by both macroeconomic and operational realities.

BY JERRY HAAR

“Curb Your Enthusiasm” is not just the title of a popular HBO television series but an astute advisory to those engaged in, or contemplating, trade, investment or commerce with Brazil. To be sure, Brazil continues to be the most attractive and “user-friendly” BRIC in which to do business. However, the irrational exuberance displayed by so many (those who have not lived or worked there) must be tempered by both macroeconomic and operational realities.

To begin with, Brazilian economic growth is heading downward. In the fourth quarter of 2011 Brazil’s economy dodged a recessionary bullet. Consumer spending cushioned a continued decline in manufacturing; and despite slowdowns in China and India, the demand for commodities also served so curtail a further slide in the Brazilian economy. Clearly, Brazil is not growing near its full potential, despite rising commodity prices and inflows of foreign direct investment. An overvalued currency has been a boon to importers, Brazilian consumers, services, restaurants, and Brazilian shoppers traveling abroad. (Retailers in Miami, New York, and Los Angeles surely believe now that Deus é um brasileiro…..or brasileira.)  However, the strong real is contributing to what many claim is the de-industrialization of Brazil, as local manufacturers of auto parts, apparel, textiles, and electronics are experiencing a competitiveness meltdown, as cheaper imports—and not just from China—eat into their customer base. The government is attempting to cushion the blow through program such as “Brasil Maior,” which offers a combination of tax cuts, financing, and trade-related measures to level the competitive playing field somewhat.

The good news is that consumers will continue to drive the economy. Firms like Redecard, Telefónica, Cielo, and AmBev have been strong performers.  Additionally, there will be a fairly steady demand for commodities and natural resources. (China especially cannot afford to slow down its economy too much for social and political as well as economic reasons.) Unemployment remains low, wages are increasing and the government is committed to continued credit growth.

Much has been made of the coming oil bonanza along with the World Cup in 2014 and Olympics in 2016—all which will provide a constant flow of revenue and a stream of employment—especially for much-needed infrastructure projects—that will keep Brazil on a growth path. Here, too, however, one must sound a cautionary note. Lower interest rates and fiscal pumping could well end up exacerbating inflation; and will there be enough construction and related jobs after 2016 to allow workers preparing for the World Cup and Olympics to maintain their employment? And what of the public debt incurred to fund these massive sports-related projects?

As for oil reserves, Brazilian deposits below a layer of salt in the Atlantic Ocean hold at least 123 billion barrels of reserves, twice government estimates and equal to that of the North Sea. However, Petrobras financials have deteriorated, and there have been production setbacks and oil spills. Additionally, Brazil’s refining capacity has hit its limit---the country now exports oil to Asia and imports it back as gasoline! For all these reasons, Banco Bradesco has lowered its rating on Petrobras.

Curbing one’s enthusiasm for Brazil does not mean discarding the country as an attractive place for doing business. Despite its challenging business environment (the country ranks 126 out of 183 in the latest World Bank Doing Business report), the assets clearly outweigh the liabilities. The sheer size of the nation with its huge consumer class, abundant natural resources, prudent fiscal and monetary policies, a middle class that now accounts for more than half the population, and a broad array of domestic multinationals and supplier networks with a global reach are compelling reasons to be guardedly optimistic about Brazil. Competitive sectors, such as agriculture and agribusiness, avionics, biopharmaceuticals, and deep-water oil exploration, are driving innovation in the country.

Brazilians have long claimed that their nation is the country of the future. No longer. The future has arrived---but it is one that poses enormous challenges along with huge possibilities. Success can come only to those who proceed with caution.

Jerry Haar is associate dean, professor and director of the Pino Global Entrepreneurship Center in the business school at Florida International University. He is also president of the Business Association of Latin American Studies

The Face of Violence...

It seems to be "Mexico week" in the New York Times. Here's another article, one which puts faces to the concept of impunity.... Even if you live in Mexico City, chances are you haven't seen or heard about this. Take a look at an artistic approach to dealing with crime.

http://www.nytimes.com/2012/03/22/world/americas/mexican-art-project-puts-faces-on-crimes-toll.html?nl=todaysheadlines&emc=tha22_20120322

Mexico in the New York Times...

If you believe it's important to know what's being said abroad, this article is a sad "must read".

http://www.nytimes.com/2012/03/18/world/americas/in-mexico-a-kidnapping-ignored-as-gang-crimes-go-unpunished.html?pagewanted=1&nl=todaysheadlines&emc=tha3_20120318

Job creation in Mexico...

The good news is that employment is rising in Mexico.  The bad news is the quality of the jobs being created.  In 2011, the number of workers registered in the IMSS (the Social Security Institute) rose by 591 thousand, 23.9% of the total jobs created in the economy.  The number of people working in the informal economy grew 1.6 million, nearly two-thirds of the total.  The percentage of people working in the informal economy rose to 29.2% in Q4, the highest percentage of any quarter since the statistical series began in 2000.  The seasonally adjusted underemployment rate hit 9.0% in Q4 2011, its third highest level since the statistical series began.  (It was higher only in Q2 2009 when it was 11.0% and in Q1 2010, when it was 0.02 percentage points higher.)  The increase in the number of “underemployed” workers (835 thousand) was 41.3% greater than the number of jobs — permanent and temporary — registered in the IMSS.    

When does 13.67% for 10-year money look cheap?

When you're Portugal and were paying 18.29% on January 31....

Greece reached a deal with its private sector creditors last Friday but the European saga is far from over. Another restructuring is widely expected. Portugal is a likely candidate, given the interest rates the country is paying for its debt.

Greece is another, although not until next year. The yields on Greece's new bonds (the ones that were restructured last Friday) are running between 14% and 19%, higher than the yield on the country's short-term debt. That's an indicator that markets expect another restructuring down the road. Even with the debt relief, Greece's debt to GDP ratio is projected to be 151% this year, dipping to 149% next year.

The cost of collecting taxes...

According to Hacienda, "During 2011, collecting 1 peso cost 0.94 centavos".

Mexico adopted a floating exchange rate regime in 1995, a consequence of the crisis. In a floating exchange rate regime, if the capital account surplus matches the current account deficit, the currency should be stable.  If the current account deficit exceeds the capital account surplus, the currency should depreciate.  Conversely, if the capital account surplus exceeds the current account deficit, the currency should appreciate.


Over the long-term, the relationships hold true.  On any given day, however, the exchange rate doesn’t necessarily reflect the underlying fundamentals of the economy.  The peso’s abrupt plunge and climb over the last six months certainly doesn’t respond to changes in the underlying fundamentals of the economy.  The fix rate went from a low of $11.57 in July 2011 to $13.95 at year-end to a low of $12.64 in February 2012.  This year alone, between January 2 and February 7, the fix rate dropped from $13.93 to $12.65. 


However, the dynamic driving the current and capital accounts does give some pause. In the former case, it is oil; in the latter, foreign investment in money market obligations.