Gold’s surge yesterday busted the critical $540 barrier Larry has been alerting you to, and its retreat toward the end of the day does not alter the trend: Up.
Oil, other natural resources, foreign currencies, and many foreign stocks are also up sharply, while the U.S. dollar is getting hammered.
The timing couldn’t be better for my yearly visit to Brazil, where I’ve just arrived.
This country has greater untapped resources than virtually any other on the planet.
Its land area, mostly temperate highlands with rolling hills, is approximately the same as ours. In fact, before Alaska became America’s 49th state, Brazil was larger by the equivalent of Texas. Now, it’s smaller by a similar amount.
Brazil’s population also has several parallels with ours: Almost every major wave of immigration to North America was replicated in this part of South America.
African slaves toiled to erect the nation’s original infrastructure. Italians and Germans helped build Brazil’s sprawling industrial centers. Japanese and their descendants helped modernize its agriculture.
Brazil’s historical trajectory — discovery, exploration, colonization, independence, and industrial revolution — include some similarities as well.
A key difference: Brazil has never undergone the trauma of large-scale war. Thanks to Napoleon’s conquest of Portugal, the Portuguese emperor fled to Brazil, and later, it was his own son who granted the young nation its independence, without a revolutionary war.
Later, the emancipation of Brazil’s slaves was also largely peaceful. Aside from a minor skirmish unrelated to slavery, Brazil has never experienced a civil war.
A contingent of Brazil’s armed forces joined the Allies in World War II. But otherwise, both world wars, and even the Cold War, largely bypassed the southern hemisphere on this side of the world.
I know Brazil intimately. I first came with my parents when I was six years old, on an American steamship. I came again when I was 12 on a Norwegian freighter.
As best I can estimate, this is my 43rd trip. Brazil is where I went to first grade, second grade and most of high school … where I met my wife and we spent our honeymoon … where her family has their farm, and where we usually spend the holidays.
One of our most memorable trips is also one of the most recent. We visited the falls of Iguaçu on Brazil’s border with Paraguay and Argentina.
The magnificent beauty of Brazil’s waterways is rivaled only by the massive hydroelectric power they can produce, a relatively clean and inexpensive fuel source that powers much of the nation.
I have fifty-three years of personal history here and tens of thousands of miles of journeys. I have much I can tell you about this great country, its failings and its successes, its pride and its shame.
But the original idea to come here was my mother’s and father’s — in 1952. To Mom, Brazil was a tropical paradise. To Dad, it was the country of the future.
Unfortunately, after many false hopes and false starts, that future never seemed to come — until, perhaps today, which is why I’m writing you now.
Brazil Has the Single Largest Reservoir
Of Untapped Natural Resources on Earth
In many key sectors, like iron ore and base metals, Brazil’s natural resources are equivalent to those of the United States and Canada combined. In terms of agriculture, the potential is even greater.
Brazil has rich deposits of gold, silver, nickel, and rare minerals.
When I was barely seven, I remember visiting a small village in the central highlands called Niquelândia. My parents told me it was so rich with nickel I would find it laying on the ground.
I thought they meant 5-cent U.S. coins, and I was a bit disappointed when I found none. But I was delighted to run around collecting nickel flakes as large as magazine covers.
Today, the nearby hills, many stripped bare, are at the heart of one of Brazil’s major nickel-producing regions.
Damage to the environment notwithstanding, Brazil is aggressively mining its resources and emerging as a major worldwide competitor across the board.
Meanwhile, China has become one of Brazil’s largest trading partners. And perhaps more so than any other country, Brazil has the capacity to feed China’s amazing growth.
The leaders of both nations are so keenly aware of this fact, they have quietly established an economic and political alliance that threatens to rival the other great cross-Pacific alliance — the one between the U.S. and Japan.
Indeed, it’s thanks largely to Asia’s growth over the past four years that major sectors of Brazil’s economy have catapulted from depression to boom.
This holds unusually rich potential for investors. But …
I’d Have to Be a Hopeless Romantic
To Overlook the Obstacles Still
Hindering a True Brazilian Miracle
Brazil is a great investment opportunity. But it’s not yet enjoying an economic boom like China’s, let alone an economic miracle like Japan’s after World War II. If investors begin to anticipate anything near that kind of performance, its stock indexes will be far higher.
What’s holding the country back? Veja magazine points out some of the key reasons in last week’s issue: Tax evasion is rampant. Interest rates are high. The government bureaucracy is cumbersome. And Brazil’s infrastructure is far behind that of modern, industrial nations.
But the same could have been said of China and India just a few years ago. And look where they are today. Either they are taking steps to overcome their problems … or their tidal wave of growth is so powerful it temporarily sweeps the obstacles to the side.
The same is beginning to happen here in Brazil.
When Brazil’s left-leaning president Luiz Inácio Lula da Silva came to power four years ago, no one on Wall Street imagined Brazil’s economy could survive intact. They expected Lula to break with the U.S. like Fidel Castro did nearly a half-century earlier. They feared Lula would destroy Brazil’s currency with rampant government spending and drive the country into a deep depression.
But he did precisely the opposite, catching Wall Street and Washington completely by surprise.
Lula befriended George Bush. He launched a two-pronged austerity drive that attacked the federal budget deficit and boosted the trade surplus. He used high interest rates to keep inflation in check. And despite the high rates, he fostered the conditions for both a strong currency and a growing trade surplus, two feats that were thought to be incompatible.
Today, the Brazilian president has a whole new set of troubles. His political party is mired in scandal, and the right-leaning opposition is capitalizing on every new revelation with great glee.
At the same time, the president’s supporters on the left, including environmentalists who used to be his staunchest allies, are up in arms. They’re upset that his austerity budgets have left no room for promised social programs and that the country is exploiting its natural resources without restraint.
But despite all of Lula’s political problems, Brazil’s economy has rarely been stronger. And he’s sticking to his program to slow inflation while reducing government spending ahead of next year’s national elections.
The government intends to lower the budget deficit by scaling back expenses, squeezing it down to less than 3% of GDP next year and to nearly zero by 2008.
If Dad were alive today, he’d be very pleased. “Brazil,†he told me on one of our many trips here together, “has everything it needs to be a leading economic powerhouse. It has abundant human and natural resources, one of the most stable governments in the Americas, and no violent revolutions.â€
“All it has to do is rid itself of its one plague that has defied all cures for so many decades: Inflation. And it will never be able to accomplish that without fiscal austerity.â€
That, in my view, is the outstanding accomplishment of 21st century Brazil: A new austerity, inflation under control, and a clear pathway toward the kind of growth that can make early investors wealthy.
Among Brazil’s Leading Natural Resource Companies,
I’m Looking at Two That Have Been Especially Strong
The first is Companhia Vale Do Rio Doce (RIO), the country’s leading mining company, with operations in iron ore mining, pellet production, manganese mining, and the production of nonferrous minerals, such as potash, copper, and gold.
The company also has substantial interests in nine hydroelectric power generation projects and three steel companies. Some highlights:
- Revenues rose 60% to US$9.2 billion for the first nine months of the year, reflecting surging demand for ores and metals.
- Net income for the period rose 97% to $3.6 billion.
- On December 9, RIO completed its takeover bid of Canadian nickel miner Canico to diversify from iron into other metals. Canico, in turn, owns the Onça Puma nickel laterite project, a ferro-nickel deposit located in the Brazilian state of Pará.
The second is Petróleo Brasileiro or Petrobras (PBR), Brazil’s largest oil and gas conglomerate:
- PBR’s revenues increased 47% to $40.06 billion for the first nine months of 2005.
- Net income increased 52% to $6.82 billion, reflecting increased gasoline production.
- Average production next year is expected to rise to 2.5 million barrels per day, including the company’s domestic and overseas operations. With four new oil platforms slated to come online in 2006, capacity should increase by 360,000 bpd. Besides Brazil, Petrobras produces crude oil and/or natural gas in Argentina, Angola, Bolivia, Colombia, Ecuador, Peru, Venezuela and the U.S.
- Next year, in Brazil alone, average production is expected to be 1.91 million bpd, helping the country achieve self-sufficiency in oil. And overseas, the company expects output to rise 16%, to 317,000 bpd.
Also Coming up Quickly:
Brazil’s Leading Banks
Brazil’s largest banks are at the forefront of this boom.
For example, União de Bancos Brasileiros (UBB), Brazil’s third-biggest non-state bank, reported last month that third-quarter profits grew by a whopping 45% compared to the year earlier.
Net income climbed to 475 million reais ($218.4 million) from 327 million reais in the same quarter last year. The bank has been one of the primary beneficiaries of Brazil’s economic expansion.
And high interest rates in Brazil, rather than being a detriment, like it is for many banks in the U.S., can actually be a boon, delivering stronger interest income on newly-expanding lending business.
Just in the last six months, the bank’s shares nearly doubled in value. And now, once the current price correction runs its course, it should resume its steep rise.
Not Yet the Time to Buy
Right now, I am not yet ready to issue a buy recommendation on these stocks.
I am waiting to see how the president is going to put his political troubles behind him, and how he’s going to get the economy through what appears to be a temporary pause in its momentum in the current quarter.
Also, many of my favorite Brazilian stocks are in a correction, and I want to see them come down somewhat further before taking action. Then, I will send an issue or flash alert to my Safe Money subscribers to add some shares like these in modest amounts. (To join, call 1-800-236-0407.)
Best wishes,
Martin
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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. Contributors include Marie Albin, John Burke, Beth Cain, Christine Johnston, Katarina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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