Update Gerdau (GGB)

Brazilian steelmaker Gerdau (GGB) turned in a great performance in the first quarter—a 23.90% gain–against considerable headwinds. I see those headwinds falling in velocity for the remainder of 2012—which suggests good things for the stock. With the ADRs trading at $9.95 today as of 2 p.m. New York time, I’ll continue to hold these shares in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ . I am cutting my target price for the end of 2012, however, to $14.80 from $16.80 on the relatively slow recovery in Brazil from the growth slump engineered in 2011 by the country’s central bank in order to fight inflation.

Gerdau’s first quarter gain came despite fourth quarter results—reported on February 15—that reflected the typical seasonal weakness in steel sales. Shipments fell by 2.9% from the previous quarter although thanks to a price increase revenue climbed by 1.1%. For the year, though, sales volumes climbed 4.3% and revenue rose 16%.

The higher prices that Gerdau did realize during the quarter weren’t enough to totally offset higher raw materials costs. EBITDA (earnings before interest, taxes, depreciation, and amortization) margins fell to 11.3% in the fourth quarter from 13.5% in the third quarter. But that margin is still better than the 10.6% that the company achieved in the fourth quarter of 2010.

Looking ahead here’s what investors can anticipate. Read more

So what’s the matter with Brazil? If you own any Brazilian stock in your portfolio, the odds are you got killed in March.

This time it wasn’t worries about inflation or economic growth. It was the currency. The Brazilian real fell another 0.3% on Friday, March 30, bringing its decline for March to 6%. That makes the real the hands down winner as the worst performing global currency in the month.

I don’t imagine that it makes the pain any less to know that the drop in the real was intentional. Read more

Brazil cuts interest rates and taxes to head off hard landing for its economy

The same day, November 30, that the People’s Bank of China reduced the amount of cash that big banks have to keep on reserve to 21% from a record 21.5%, the Banco Central do Brasil cut actual interest rates for a third straight meeting. Today, December 1, the Brazilian government suspended a tax on foreign investment, and cut taxes on appliances, food staples, and consumer credit.

The goal of all this is to reverse a drop in Brazil’s growth rate that has started to worry the central bank and Brazil’s government—especially because the slowdown in European economies is expected to accelerate in 2012 with a good chance that the EuroZone will slip into recession. Brazil’s economy is forecast to grow at just a 3.1% rate in 2011. That’s quite a drop from the 7.5% growth of 2010.

Brazil’s central bank had raised interest rates to 12.5% in an effort to slow growth and reduce inflation to the bank’s target range of 4% plus or minus two percentage points. But now, even though inflation is still not under control (the annual rate of inflation was 6.69% in October), the bank has decided that the danger of Brazil’s economy stalling is great enough to reverse policy and begin cutting interest rates.

Yesterday’s move brings the benchmark Selic rate to 11%. In its post-meeting statement the bank signaled that this wouldn’t be the last cut either. The futures market is now pricing in a benchmark interest rate of 9.25% by July.

The Banco Central do Brasil didn’t give a growth target when it cut interest rates yesterday but the government did when it cut taxes today. The goal is to produce 5% growth in 2012 even with the slowdown in the global economy.

Like China, Brazil has decided to move to lower the odds of a hard landing for its economy.

It’s early. The results are open to revision and interpretation. And one month doesn’t make an investible trend anymore than a single swallow makes a spring.

But have you noticed? In the last month emerging stock markets such as China and Brazil have outperformed the U.S. market.

And that’s an absolute turnaround from results in 2010 and for most of 2011. Does it mean that we’re about to reverse the pattern that’s held for more than a year and see emerging markets start to outperform developed markets? Well, sort of. The picture right now shows that the outperformance is limited to some emerging markets and even in those markets, so far, the outperformance is spotty.

But I do think there’s the beginning of a trend here that your portfolio needs to respect. And since it’s so early, you need to pay attention to what kind of stocks in these emerging markets investors are willing to buy right now.

Here’s the data.

For the U.S. markets–for 2010 the Standard & Poor’s 500 stock index was up 15.02%. For 2011 to date, as of November 15, the S&P 500 was up 1.65%. In the last three months it gained 5.05% and for the last month 2.85%.

For Brazil—for 2010 the iShares MSCI Brazil Index ETF (EWZ) was up 7.69%. For 2011 to date as of November 15, it was down 19.54%. In the last three months the loss was a more modest 2.80% and in the last month the index climbed 4.35%.

Yep, after trailing for 2010. After getting killed in 2011 to date. After trailing badly over the last three months. In the last month the Brazil index beat the U.S. market.

China shows the same pattern—with some important wrinkles. Read more

Update Itau Unibanco (ITUB)

On November 1 Brazil’s Itau Unibanco (ITUB) reported third quarter adjusted net income, which excludes one-time items, of 3.94 billion reais (or $2.3 billion). That was up from 3.16 billion reais in the third quarter of 2010. That’s a 24.7% increase. The results also easily beat the analyst estimate of 3.65 billion reais for the quarter. (Reais is the plural of real.)

Great numbers.

But before you rush out to buy these shares—and the stock is a member of my long-term Jubak Picks 50 portfolio http://jubakpicks.com/jubak-picks-50/ –you need to get your head around this number. In the quarter the bank posted an annualized return on equity of 22.7%. That was up from 22.2% in the second quarter. As you’d expect that measure of profitability at Itau obliterates the return on equity at troubled U.S. banks. The comparable measure at Citigroup (C) is just 6.72% for the last 12 months and a negative 1.45% at Bank of America (BAC). But it also humbles the profitability at some pretty good U.S. banks. JPMorgan Chase (JPM), for example, shows a return on equity of 10.9%, PNC Financial (PNC) 11.92%, and U.S. Bancorp (USB) 14.24%.

That ought to raise a big screaming question in your mind—Is the Itau Unibanco story that good? Or is there some huge burden of risk hanging over the stock that means you shouldn’t buy it even with that kind of differential in profitability? Read more