Last week was the worst for the Dow Jones Industrials in over four years, and I think it’s too soon to expect a turnaround.
Quite to the contrary, this is the signal to reduce your risk, build your cash and search elsewhere for new opportunities.
Asia is a good place to start, and today is your last day to jump on board with our Asia ETF recommendation that goes out tomorrow morning. (See my latest report just posted on the Web Saturday.)
Brazil is also a great place to start looking for greener pastures.
In fact, in just three days, Air Force One will touch down at Brasilia’s Juscelino Kubitschek airport … President Bush will sign a land-breaking ethanol deal with President Lula … and the ethanol profit explosion I’ve been writing you about will be off the launch pad.
For most investors, this is coming as a huge surprise: Few believed the administration would defy the corn-based ethanol producers in the United States. Nor was it known that the President would launch this monumental initiative so personally and so quickly.
But for anyone who’s been reading our Money and Markets, it’s the natural, obvious, inevitable outcome of quiet — but dramatic — events we’ve been bringing to your attention week after week.
Just two weeks ago, for example, on our live global teleconference, Joseph Weiss, on the scene in Brasilia, gave you a clear heads up.
He told you that U.S. State Department officials were in Brasilia on that very day. And he alerted you to the news, unreported on this side of the equator, that they were negotiating a critical strategic alliance with the U.S. for the production of ethanol. (See Gala Edition: Immediate Global Opportunities.)
Were you listening? I hope so. Because this past Friday, the big news broke in New York: On the front page of Saturday’s New York Times, under the headline “U.S. and Brazil Seek to Promote Ethanol in West,†reporters Edmund L. Andrews and Larry Rohter, wrote …
“The agreement could lead to substantial growth in the ethanol industry in Brazil as technology and manufacturing equipment developed there is exported to other countries in the region.
“Much of the ethanol produced there is made from sugar cane and is far cheaper to produce than the corn-based ethanol that has been nurtured by protective tariffs and government mandates in the United States.
“By increasing ethanol production and consumption, particularly in countries that produce sugar, officials of the Bush administration hope to reduce the region’s overall dependence on foreign oil and to take some of the pressure off oil prices …
“This is more than a document, it’s a point of convergence in the relationship that is denser and more intense than anything we’ve seen in the last 20 or 30 years,’ Antonio Simões, the director of the energy division of the Foreign Ministry of Brazil, said in a telephone interview from New York. ‘Brazil will profit, the United States will profit, and so will third countries. It’s a win-win situation for everyone involved.’’
We Have Been Waiting for
This for a Long Time.
Now It’s Finally Happening
Since the 1940s, sugar cane and the future of ethanol have been the entire focus of our family in Brazil.
Elisabeth’s father, the former president of the Sugar Cane Growers’ Association in the largest sugar cane region of São Paulo state, was a vigorous early proponent of ethanol before it was even known by that name.
And since he passed away, Elisabeth’s sister, the current president of the association, has picked up the mantel, lobbying for ethanol in Brasilia, speaking out for ethanol at the United Nations in New York, and traveling the world for the cause.
All told, we’ve been harvesting, cutting, eating and virtually breathing sugar cane for many decades, always with an eye toward ethanol.
Now, this industry, still in its infancy, is finally taking off from the launch pad. But the big growth has barely begun.
The Advantages of
Ethanol Are Overwhelming
Unlike crude oil, the supply of ethanol is renewable and is not depleted.
And unlike gasoline, the refining and consumption of the fuel can be relatively clean.
Long term, ethanol is a partial answer to global warming and could be a very substantial answer to America’s over-reliance on supply chains from the Middle East and Persian Gulf.
Shorter term, the U.S.-Brazil ethanol alliance can even help reduce the growing influence of Hugo Chavez, the president of oil-rich Venezuela.
In my January article, Ethanol Explosion! How to Profit, I explained it this way:
Suddenly and silently, the world’s demand for ethanol is about to explode, creating a global business that could make early investors wealthy.
Consider the facts:
Fact #1. Every country on the planet wants to see more of its automobiles running on renewable fuels like ethanol. And with 600 million gas- and diesel-burning cars and trucks on the road today, that implies the most massive transformation since the industrial revolution.
Fact #2. Every major government is implementing policies that stimulate ethanol consumption. And with hundreds of billions of public money pouring into research and development, this is not exactly a temporary fling.
Fact #3. Wealthy individuals, large banks, and major mutual funds are now going to be looking much more seriously at ethanol. And yet, the big flows of investment money into ethanol have barely begun.
A New Mega-Industry Is Born
For at least two decades — from the early 1980s to the early 2000s — the ethanol industry was largely stagnant.
Ethanol production in the U.S. and Canada was growing, but only gradually. Brazil’s ethanol output was actually sliding. And worldwide output was stagnating.
Then, at the turn of the new millennium, two things happened: The U.S. government and industry began to push ethanol more forcefully. And Brazil, still the world’s leading producer despite the earlier decline, took off.
Result: Worldwide ethanol production has nearly doubled in five years … the surge in volume has triggered the development of new, more efficient technologies … and a new mega-industry has been born.
Right now, the only country with cars running on pure ethanol is Brazil. But a mix of ethanol and gasoline is used in the U.S., the European Union, Mexico, India, Argentina, Columbia and, now, Japan.
Brazilian Ethanol:
World’s Richest Investors
Are Starting to Pile In!
George Soros’s Adeco has recently bought a major ethanol plant in Brazil. Bill Gates acquired a share in three new plants in Brazil’s western state of Mato Grosso do Sul. Even Google’s Larry Page and Sergei Brin have revealed plans to invest in Brazilian ethanol.
International companies are one step ahead of them: Infinity Bio-Energy, which trades on the London exchange, already operates Brazilian ethanol plants valued at $200 million and plans to invest another $500 million in five more plants by year-end. Evergreen, a British group, has recently bought Cridasa, a major ethanol producer in Minas Gerais. And the French group Tereos bought 6% of Brazilian ethanol producer Cosan and owns three plants.
Overall, investments in Brazil’s ethanol industry are surging. In 2005, they were about $6 billion, including new plants, acquisitions and expansions. In 2006, they’ve surged to nearly $10 billion. And by 2010, even if there’s a recession in the U.S., they should hit at least $15 billion.
The main attraction: Ethanol is transforming Brazil’s economy and, propelled by the upcoming deal between the U.S. and Brazil, Brazil’s ethanol technology is about to transform the world.
The key factor: Innovative ways of lowering the cost of production. Back in 1980, it cost Brazil’s ethanol producers over $2.60 to make just one gallon — not exactly competitive with gasoline! But now, Brazil is churning out ethanol for a meager 75 cents per gallon. And Brazil’s science agencies are funding a raft of new R&D to drive the cost down even further. So even if petroleum and gasoline prices fall further, Brazil’s ethanol will remain extremely competitive.
Already, nearly every single car rolling off Brazil’s assembly lines has a flex engine capable of burning either ethanol or gasoline. So when we’re driving in Brazil, we can fill up with whichever fuel happens to be cheaper. And when our tank is half empty, we can even mix the two fuels at will.
The flex engine has far-reaching implications. And although it’s going to take time, ultimately, I see nothing that can stop it from spreading to the world’s largest fuel consumers — the U.S., Europe, Japan, China and India.
Even before that technological shift takes place, Brazil’s shipments of ethanol to overseas markets are surging. Late last year, it jumped 91 percent to 144 million gallons from 76 million gallons a year earlier. Plus, Brazil is negotiating with Japan, China, India and the EU to export still more. Even Brazil’s ethanol exports to the U.S. are growing despite a huge, 50-cent-plus tariff per gallon.
Japan: Ethanol Sleeper Wakes Up
Until recently, Japan was the world’s largest sleeping giant with respect to biofuels. Now it’s wide awake and leaping forward.
Prime Minister Shinzo Abe plans to increase consumption of biofuel for transportation to 3.15 million barrels by the end of 2010. He will boost the ethanol content of regular gasoline to as much as 10 percent. And as a result, Japan’s purchases of ethanol will rise to as much as 44 million barrels per year.
Nippon Oil and other Japanese refiners have set their goals even higher. They want to replace 20 percent of Japan’s gasoline and diesel consumption with biofuels.
That’s why we’ve seen so many Nippon Oil executives in Brazil in the last couple of years. And that’s why they’ve created Brazil Japan Ethanol Corp., a joint venture with Petrobras, Brazil’s only major ethanol exporter. The company will start shipping ethanol to Japan in 2010, aiming for 37.7 million barrels by 2012 — not only for consumption in Japan, but also using Japan as an ethanol sales hub in Asia.
Meanwhile …
Australia has had voluntary goals in place to blend up to 10% ethanol by 2010. But now it looks like it could meet its target one or two years ahead of schedule.
Canada has provided tax benefits for ethanol since 1992, while various Canadian provinces have similar mandates.
Argentina requires use of 5% ethanol blends over the next five years.
India mandates 5% ethanol in all gasoline.
Indonesia aims for 10% biofuel use.
And this is just the beginning.
Why Brazil Could Be
The Next China-Like Miracle
Brazil’s ethanol opportunity is just one of many.
Take a quick look back to recent history: In the 1970s, Brazil was expanding at the China-like clip of about 9 percent. Each year, Brazil was boosting exports by approximately 20 percent. Within less than a decade, thousands of early investors became multi-millionaires. But the party came to a premature end for one simple reason: Inflation.
The primary difference today: Brazil’s inflation monster has been tamed. Twelve years ago, Brazil stopped rampant inflation in its tracks by introducing a new currency, the real. Ten years ago, it passed a law preventing federal and local governments from spending beyond their means. And starting four years ago, Brazil’s president has transformed the country from one of the world’s most fiscally shaky nations into a model for fiscal responsibility.
- In his first term, which just ended …
- He reduced consumer price inflation from 12.5% in 2002 to under 3% in 2006.
- He paid off every penny owed to the IMF.
- He slashed Brazil’s total domestic debt load.
- He boosted the value of the real from $0.28 to $0.47.
- And he transformed Brazil’s trade balance, formerly a deficit, into a $46 billion yearly trade surplus.
This past week, while the Dow tumbled, the Brazilian market fell in tandem. That’s natural and to be expected.
But the country is just warming up. In Lula’s second term in office, which began in January, he’s helping to kick off a whole new series of economic reforms.
- Until now, for example, Brazilian entrepreneurs had to plow through endless amounts of red tape to start a new business and then pay at least eight different taxes to operate one. But starting this year, they will enjoy vastly simplified rules for incorporation … just one, lower tax instead of eight … plus double the supply of credit.
- Also starting this year, investment in Brazil is likely to accelerate. Already, new projects approved by the national development bank have surged 36%. Ford and GM have committed billions to launch new auto models in Brazil. And most significant of all …
- Investments in new Brazilian projects will reach 25% of GDP this year, similar to the levels that have prevailed in China and India!
- And all this is before the impact of the deal Mr. Bush and Lula will sign this week.
Your Next Steps
Brazil is best known for its production of agricultural commodities — first coffee … then sugar … then soybeans … and, now, ethanol.
But Brazil is also among the leading exporters of aircraft … mineral ores … metals and steel.
And Brazil makes more automobiles than the U.K., Italy, Mexico or India … and it is the world’s largest maker of cars with flex engines (that can run on either gasoline or ethanol).
No investment is without risks, and Brazil certainly comes with its fair share. But after a normal correction, consider some of Brazil’s leading companies traded on U.S. exchanges:
Embraer (ERJ) is a $7 billion company which has steadily risen to the #3 spot among the world’s largest aircraft manufacturers — ahead of Canada’s Bombardier and surpassed only by Boeing and Airbus.
The company is especially strong in the fast-growing market for regional aircraft — like the 50-passenger twin-jet ERJ 345 and the 37-passenger ERJ 135.
And it makes military aircraft for transport, training and light attack — sold not only to the Brazilian Air Force but also to 16 countries in Europe and Latin America, including the United Kingdom, France, Greece, and Mexico.
Since January 2002, while the Dow Jones Industrials has risen by 24.7% through last Friday’s close, Embraer is up 102%, rising four times faster than the Dow.
Petrobras (PBR) has done even better, rising twelve times faster than the Dow in the past five years.
The company has achieved Brazil’s long-yearned-for self-reliance in oil and is leading the country’s drive to expanding ethanol exports.
It supplies oil and natural gas to refineries in Brazil and sells surplus production in foreign markets. It refines, transports, and exports oil … buys crude oil and oil derivatives … owns petrochemical companies and fertilizer plants … plus invests in natural gas transportation and distribution, as well as electric companies.
But Companhia Vale do Rio Doce (RIO) puts both Embraer and Petrobras to shame:
Its shares have skyrocketed 591% over the past five years, rising twenty-four times faster than the Dow.
It recently bought Canada’s INCO copper mines, becoming the largest mining and metals company in the Americas; the second largest in the world.
It is the world’s largest producer and exporter of iron ore and pellets, the world’s second largest producer of nickel, manganese and ferroalloys, and one of the world’s lowest-cost integrated producers of aluminum.
Brazil’s banks have also been growing by leaps and bounds. And the three key Brazilian-owned banks traded on the New York Stock Exchange — Bradesco (BBD), Itaú (ITU) and Union of Brazilian Banks (UBB) — have also beaten the Dow by a wide margin. Bradesco leads the pack, up 362% since January of 2002, or over 14 times more than the Dow.
When I was growing up in Brazil, it was almost impossible for individual American investors to buy these companies. Today, it’s as easy as buying U.S. shares: Each is available for purchase as American Depository Receipts (ADRs) right here in the U.S.
Or you can use the widely traded Exchange Traded Fund linked to Brazil’s stock market index: iShares MSCI Brazil Index (EWZ), up 243% since January of 2002 (nearly 10 times more than the Dow).
Corrections are natural, but the opportunities are vast.
Good luck and God bless!
Martin
About MONEY AND MARKETS
For more information and archived issues, visit http://legacy.weissinc.com
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://legacy.weissinc.com
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
© 2007 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
