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VALE: Cheap but not cheap enough yet

posted on November 16, 2015 at 1:27 pm

As of November 16, 2015, I’m keeping Vale (VALE) in my long-term 50 Picks portfolio. If you hold the shares of this Brazilian iron ore producer, I’d continue to hold. If you were thinking of buying because the shares look so cheap at $3.93 today, I’d say “Not yet.” I’d look to buy the New York traded ADRs (American Depositary Receipts) at $3.30 or so—about 15% below the 52-week low. (Vale was a member of my 12-18 month Jubak’s Picks portfolio until October 13, 2014. I sold it on that date at $11.47.)

Two reasons to buy (or hold onto) Vale at these prices. First, the iron ore cycle will turn someday as growth in the global economy picks up and as demand/supply come back into balance. Second, Vale is expanding production at its Carajas mine, a project with one of the richest iron ore bodies in the world. Because the iron ore at Carajas is so rich it sells for a premium on world markets and it helps make Vale the low cost iron ore producer in the world. Add in cost reductions, the efficiency of the new truckless operations at Carajas, and China’s recent willingness to accept the extremely big ore carriers that Vale increasingly uses, and Vale has been able to reduce its cost by 15% in the most recent quarter to $34 a metric ton delivered in China. When the market for iron ore does finally turn Vale will be one of the big winners.

But the reasons to hold off on buying are more numerous.

First, the momentum in Brazil’s financial market is still thoroughly lower. ETF iShares MSCI Brazil Capped (EWZ) was down 35.07% year to date for 2015 as of November 13. Vale itself is down 33.6% year to date. Brazilian service and consumer sector leaders Kroton Educacional (KROT3.BZ in Sao Paulo) and Natural Cosmeticos (NATU3.BZ), respectively, are down 56.15% and 42.86% for the year. In the currency market the Brazilian real is the world’s worst performing currency, down 31% in 2015 to date. The country’s debt has been downgraded 4 times since 2014 by Standard & Poor’s, most recently to junk in September.

Second, the country’s economy is a mess. The economy is in recession and the Banco Central Do Brasil projects that GDP will fall by 2.7% in 2015 and by 2.2% for the four quarters ending with the second quarter of 2012. The bank projects inflation of 9.5% for 2015, way above the central bank’s inflation target of 4.5% give or take two percentage points. That forecast is built on the assumption that the Selic benchmark interest rate will be 14.25% during the period.

Third, the country’s politics are so convoluted with President Dilma Rousseff facing six (at last count) impeachment resolutions, that it is unlikely that the Brazilian legislature will tackle the country’s big problems (budget deficit, corruption, a bloated state sector, etc.) anytime soon.

And fourth, although iron ore prices will turn someday, they are still falling and it looks like supply won’t come into balance with demand until 2017 or 2018.

On balance this earns Vale a place in this long-term portfolio on the company’s potential. And a current rating of HOLD CHEAP BUT NOT CHEAP ENOUGH as of November 16, 2015. I’d put Vale in my cyclical commodity, and developing economy silos for its long-term trends.

What I posted on my paid site today–buy/sell/when on Brazil and the beginning of revisions to my long-term portfolio

posted on November 13, 2015 at 7:37 pm
Brazil flag

Today, on my paid JubakAm.com site I posted a very long look at whether Brazil is cheap enough to buy now–it’s not I concluded–and gave my reasons for wanting to see another 10% to 15% decline before buying Vale and Itau Unibanco.

Besides offering an analysis of the Brazilian economy and market, this post is also the introduction of a new system that adds more timing to the fundamentals of my long-term 50 stocks portfolio. As I work my way through this portfolio, I’m going to add timing guidance–such as the “Cheap but not cheap enough yet” opinion Im going to add to the entries for Vale and Itau Unibanco in that portfolio. (I’m also going to weed out stocks where fundamentals have changed or the timing just looks too unfavorable. So I’m dropping Brazilian airline Gol.)

To read about Brazil, you’ll need a subscription to my paid JubakAM.com site.

The changes to the portfolio, however, will show up on both the paid site and on this free JubakPicks.com site. The bookkeeping will probably take me until Monday but after that you should see the changes to the portfolio on both sites. The next set of changes will go up next week in a post on the banking sector.)

That’s what I’m working on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway. (There will be some new posts on the paid site over the weekend. I’ll summarize them for readers of my free site on Monday.)

Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more detail on my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Here’ what I posted about on my paid JubakAM.com site today

posted on October 26, 2015 at 7:43 pm
chickens indoors

Today, on this free site, I posted a buy of of Alibaba on a return of short-term momentum and a calendar for a week full of potentially market moving news.

On my paid JubakAm.com site I looked at another source of market and economic volatility over the next six months, the likelihood of a record El Nino weather pattern starting in December. El Nino patterns feed off above average temperatures in the Pacific to create floods and droughts from India across the Pacific to Brazil. The strongest El Ninos can crash coffee crops, citrus harvests, and wheat crops, turning commodity markets upside down. It’s certainly hard to pick El Nino winners from that disruption but in my post I pointed toward three chicken producers, one in Mexico and two from Brazil. The two in Brazil are likely, I noted, to pick up extra sales from the very weak Brazilian real.

That’s what I’m working on at my subscription JubakAM.com site–I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway. (I had hoped to finish a Sector Monday post on banks tonight. But that now looks like a piece for tomorrow.)

And, of course, there’s an ulterior motive: If you decide that you’d like more detail on those posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)

Sell FMC

posted on October 1, 2015 at 7:36 pm

FMC (FMC) has two big problems. It’s agriculture solutions business is too exposed to Latin America in general and Brazil in particular, and the stock is not cheap enough given the dismal near- and mid-term forecast for Brazil. In 2014 52% of revenue from the company’s agriculture solutions unit came from Latin America.

How bad is business in this region? Take a look at Brazil, the biggest economy in the region and the biggest basket case.

Brazil’s economy shrank in the first and second quarters of 2015 with annualized growth in the second quarter contracting at a 2.6% rate. Analysts and economists are projecting that the country will finish all of 2015 in the red with the economy contracting by 2.5%. Things do get better in 2016 but not quickly and not by whole lot. Forecasts for 2016 have recently moved from a modest 0.3% expectation for growth to a call for a further 0.3% contraction. With inflation running at 9.56% year over year as of July—well above the government’s target of 6.5%– and with the Banco Central do Brasil determined to raise interest rates to fight inflation, another year of pain seems all too reasonable. At 14.25% in September, the bank’s benchmark interest rate was already the highest in nine years. Consumer interest rates in Brazil can go as high as 85%, according to the central bank. As you might imagine interest rates like that have put a big crimp in domestic demand.

Including in the agricultural sector where farmers use credit to buy the agricultural chemicals that FMC sells. Inventory for those chemicals in Brazil now stand at as much as a season’s worth of supply according to Credit Suisse. In that supply/demand environment pricing pressures—all in the downward direction—are severe. A plummeting real, which makes everything more expensive for Brazilian farmers in dollar terms, adds to the problem.

And the result for FMC? For example, on September 23 Credit Suisse cut its target price for FMC to $42 from $66 on weakness in the Brazilian market.

As an individual company, I like what FMC is doing to restructure and upgrade the company by selling lower margin—and non-core–businesses and using the proceeds (and debt) to buy faster growing and core businesses (such as Cheminova) that increase exposure to under-represented markets (such as Europe) and allow FMC to lower costs. I think this is a value stock headed for a turnaround. Company officers apparently think so too. Recently the CEO bought 48,909 shares. Other senior executives added 24,000 shares. Directors purchased 38,000 shares.

All things being equal I would continue to hold this stock in my Jubak’s Picks portfolio.

But all things aren’t equal.

There’s the dismal forecast for Brazil—which could get even dismal-er as the government of President Dilma Rousseff sinks under scandal. The president had an 8% approval rating with a 71% disapproval rating this summer—not exactly conducive to the clout a politician needs to get things done. That means a recovery in the Brazilian part of FMC’s business could be far away indeed—and that the timing of any recovery is just about total speculation. (My guess would be that a recovery is likely to coincide with the end of Dilma’s term in office. But she only began her second four-year term in January 2015.)

And there’s the relatively high price of FMC’s shares. I know it may seem odd to talk about a stock that’s down 40.84% for 2015 through September 30 as expensive. (The shares are down 56.3% since I added them to my Jubak’s Picks portfolio on June 12, 2014.) But they are on what I’d call an adjusted potential-recovery-basis. Think of FMC shares as an option on a recovery in Brazil and the other emerging economies that buy a lot of agricultural chemicals. At the September 30 close at $33.67, this is pricey option given the way that this stock is likely to lag such top of the mind Brazil and/or emerging market plays such as iron miner Vale (VALE) or Brazilian and Latin American banking sector leader Itau Unibanco (ITUB.) As options both are much cheaper than FMC—at $4.20 and $6.62 a share, respectively—and on past track records, they’re more likely to move up strong and fast on any recovery.

If that’s too much higgly-piggly thinking for you, then think of it this way, I’m selling FMC today because after this huge sell-off in emerging market and commodity stocks, I think there are better places to put my money for an eventual recovery.

Whenever it might be.

Emerging markets poised between sell off and panic

posted on January 24, 2014 at 4:46 pm

What’s ahead, sell off or panic?

After today’s action I think we can take “buy on the dip” off the list of alternatives.

Everything is down today—with the surprising exception of the Shanghai Composite index, which closed up 0.6% overnight.

At 3 p.m. New York time, the Standard & Poor’s 500 index was down 1.56% and the Dow Jones Industrial Average was off 1.55%. Mexico was 1.31% lower and Brazilian stocks were down 1.1% in Sao Paulo. In Europe the German DAX had tumbled 2.48% by the close of that market; in Milan Italian stocks were down 2.30%; and in Spain the IBEX 35 index was lower by 3.64%.

In Asia Hong Kong’s Hang Seng closed down 1.35% and Japan’s Nikkei 225 was off by 1.94%

Among other emerging markets Turkey’s BIST 30 index was lower by 1.74% and South Africa had dropped by 1.36%.

What’s going on? Read more

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