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Inflation drops (a bit) in Brazil bringing an end to central bank rate increases just a little closer

posted on June 9, 2010 at 11:02 am
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Inflation dropped in Brazil in May.

For the 12 months ended in May consumer prices rose at a 5.22% annual rate. That’s a drop for the 5.26% annual rate recorded in April. This is the first decline in Brazil’s inflation rate in seven months.

The slowing of the pace of inflation isn’t likely to deter Brazil’s central bank from raising interest rates later today. The consensus among economists is for an increase of 0.75 percentage points. That would take Brazil’s benchmark Selic rate to 10.25%. Even at 5.22% inflation is running ahead of the central bank’s 4.5% target for inflation this year.

But the slowdown in inflation plus the decisive action on interest rates by the Banco Central do Brasil—the central bank raised interest rates 0.5 percentage points last month–has raised financial market expectations that Brazil will be able to get inflation under control without tanking economic growth.

The Brazilian economy grew at a 9% annual rate in the first quarter of 2010; economists expect to see—and hope to see–slower growth in the second quarter. JPMorgan Chase has projected a 7.5% economic growth rate for the entire year.

In a sign of confidence that central bank policy will succeed in controlling inflation, the difference between overnight interest rate future contracts due in January 2011 and those due in January 2013 narrowed to 1.01 percentage points this week. That’s the smallest gap in 14 months and pretty much wipes out the 0.43 percentage point increase in the size of the gap in April. In that month financial markets seemed to be signaling a loss of faith in the central bank after it failed to raise interest rates in March.

The fall in inflation and the size of today’s interest rate increase are key to figuring out when to buy into Brazilian stocks. Stock prices are likely to remain under domestic pressure—plus whatever penalty the euro debt crisis imposes on share prices in emerging markets—until the Banco Central do Brasil reaches the end of its interest rate increases. The consensus before today’s inflation number was that the bank wouldn’t stop until the Selic rate was 12% or so.

 If inflation continues to decline, albeit modestly, and the bank continues to eat up the interest rate turf with 0.5 and 0.75 percentage point increases, the end to the bank’s rate increases may be closer than the end of 2010 target assumed by the consensus earlier this year. Much closer.

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  • jrb on 9 June 2010


    I’m sorry, this post is off-topic, but I think this is the only way I can relay this message to you. I would like to hear more of your thoughts on short-term trading opportunities. By his own statements Jim has said he tends to hold stock investments 12-18 months before selling. But I get the feeling from your posts that you have become skilled in buying and selling stocks on an even shorter term. (Though I am glad I did not buy EUO, EPV, DRR yesterday, given their drops today). Jim, have you considered adding a message board to your site for conversations that are off-topic from your posts? Maybe you have already addressed this somewhere but I don’t recall seeing it. Regardless, I have found your site and insight to be outstanding Jim, and I hope this first year has been as successful as you hoped it would be!

  • ogowan on 9 June 2010

    At a time when some are calling on STD to raise cash, the company shelled out 2.5 billion to BofA for mexican banks that they had previously sold for something like 1.3billion to BofA in 2003.
    Some say it is a show of confidence. Interesting how diverse the opinions are on STD.

    Note; I have been buying STD

  • andante on 9 June 2010

    I think Ed’s recommendations for Euo, EPV and DRR were made many days ago when they were lower and that he is still ahead even though they did drop some so far today.
    As Jim keeps reminding, you have to stay nimble in the current mkt.

  • AE on 9 June 2010

    Ed and andante,
    I thought exactly that. That you had bought EUO , EPV, and DDR., and also you intended to buy some SDOW, SPXU, and SQQQ yesterday!
    I like to read all comments , especially the ones which are more active … Both of you Jim and Ed are so good . … and I am used to use inverse , double and triple bears .
    Ed , could you just tell me if you have changed your mind just for technical analysis to bull ETFs such as SSO and the like say up to 1.200 S&P 500?
    Thanks for this site, Jim .

  • marr.bo on 9 June 2010

    I’d like to point out that Ed’s approach with these short term shorts is legalized gambling with a high tax rate.

    There is a darn good reason Jim has a 12-18 month approach. First capitals gains where the security is held less than a year is taxed at 35% instead of the 15% if you hold for at least a year.

    Further, efficient market theory and quantitiative finance theory shows that short term trading in stocks is random and is the same as playing roulette without the green squares involved. The quant traders you hear about do almost all of their short term stuff with fixed income securities because these have an intrinsic predictable value, unlike stocks.

  • AE on 9 June 2010

    I am afraid I misunderstood the headings of the first message and read it wrong!

  • EdMcGon on 9 June 2010

    To everyone,
    I am trading from a brokerage IRA, so I can afford to trade short term, since I’m not seeing tax impact until I withdraw the money at retirement. If you are trading with a regular brokerage account, be aware that your taxes for short term gains will be higher!

    I would still recommend DRR. The euro is not done falling yet.

    Right now, I have limit buy orders out on SDOW, SQQQ, and SPXU.

  • EdMcGon on 9 June 2010

    Amen to the nimble comment!

    For the record, I first bought EUO on 5/4, and added to my position several times through 5/6. I sold half my position on 5/27.

  • EdMcGon on 9 June 2010

    I would not touch a bull ETF right now. Period.

    I agree with everything you said. I would remind everyone here that short term trading is NOT for the faint of heart. Right now, I am taking calculated risks based on macro trends.

    But I look at it this way. I could be losing money sitting on a long term position right now just as easily as I can lose money on a short term short position. At least the short term short has some upside potential.

  • sigli on 9 June 2010

    Ed is getting a nice following of groupies on here. :)

    For those–What Marr.bo said, plus: not that Ed’s opinions are bad or good, but if you are asking a guy named Ed for opinion or advice on a short or short term idea on an internet blog then there’s a pretty good chance you have no business trading or shorting anything. It’s almost guaranteed you will lose money. The only way you won’t is if you’re that fantastically lucky outlier sitting at the end of the curve.

    Most won’t listen, and we all have to pay our tuition (was it Charles Schwab or Bill O’Niel who said that?). Many of us pay it over and over and over.

  • EdMcGon on 9 June 2010

    I agree completely.

    When I say what I’m buying, that does NOT mean anyone should rush right out and buy it. Do your research folks. Ask questions if you’re not sure what to look for.

    I would say the same thing about Jim Jubak, Jim Cramer, or Warren Buffett. Everyone needs to develop their own investment strategy, and not just listen to ANY person’s investment advice. Having said that, it is good to listen to what these people have to say. You can learn from them. Most likely a lot more than you can learn from some fool named Ed in a blog comment section. ;)

  • marr.bo on 9 June 2010

    The only caveat I would add to what you just said Ed, is that a study has recently come out (can be found at the blog section of WSJ.com) that traders that follow the trades of investors who have continually beat the market over a long term period (decades) does yield positive results.

    So in that respect I would argue Warren Buffet and Jim Jubak make sense to follow, but not Jim Cramer.

  • PGM08 on 9 June 2010

    Jim, any thoughts on the direction of the Brazilian Real versus the US Dollar? With interest rates high and going higher, I was wondering if you had any thoughts on BZF (which “seeks to earn current income reflective of money market rates in Brazil available to foreign investors, and to provide exposure to movements in the Brazilian Real relative to the United States dollar”) or bonds or deposit accounts denominated in Brazilian Real.

  • nocnurzfred on 10 June 2010

    Wow! I barely understood a thing in this article, probably due to the culmination of my math skills peaked in the 6th grade. Anyway, had previously bought STD @ 11.80, when it was falling, just added more 2 days ago to bring cost basis to 10.80. Not sure how they will finance the BoA acquisition, but it should make a lot of sence. Will take time though. I too started becoming an “Ed” fan, even though I don’t know how to, or what the heck he invests in.

  • EdMcGon on 10 June 2010

    The trick is to learn HOW the experts achieved their success. I liken it to learning military strategy from great generals. While individual strategies won’t work in every battle, they are a tremendous mental resource to utilize when the opportunities arise.

    BZF is a safe place to put money, but don’t expect to make huge profits. I would almost call it a “cash” investment.

    First, thanks for the compliment! Second, for the record, I look for the best investment opportunities, whether long or short term. Because the long term view is so muddied right now, I am changing my strategy to a shorter term approach.

  • nocnurzfred on 10 June 2010

    Being the simple sort I am, I am pleased to announce being halfway back to break even on my STD. Did make money twice this past week and a half on 200 share lots of UIL. Originally bought for the June 15 dividend, but exceeded the dividend amount each time before the ex dividend date. Might even buy it back early next week. Working from a traditional IRA, so am not sure of those “rules”. There are many dividend “groups” to be played, sometimes they work like clockwork, sometimes you hold a stock for 4 months & collect 2 quarterly dividends. Is this too simple?? Presently holding STD, HRP, LINE, & PBCT.

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