Update Gerdau (GGB)

Brazilian and U.S. steel-maker Gerdau (GGB) was up 3.6% yesterday and another 1.3% today, June 30, as of 3:00 New York time on calls from Goldman Sachs and Deutsche Bank for a possible third-quarter surprise in demand for steel and for rising prices with current levels forming a floor. (Gerdau is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

Shares of other steel-makers were up as well with Nucor (NUE), for example, gaining 4% yesterday and today.

I think it’s the positive change in sentiment toward emerging stock markets that has led to the relative out performance by Gerdau to the steel group. Brazil’s major market index, the Bovespa is up 1.6% from June 24 through 3:00 New York time today, June 30. That’s quite a contrast to the 4.1% loss recorded by the index from June 9 through June 16. And during that period Gerdau has substantially underperformed the market index. In fact, for 2011 to date shares of Gerdau are down 20.63% versus a drop of just 2.81% for the iShares MSCI Brazil Index (EWZ).

So you can see why Gerdau might be bouncing higher than its peers today.

On the fundamentals Gerdau isn’t out of the woods yet, but the forest is thinning. Read more

Buy GOL (GOL)

Doing some catch up on this stock. I added GOL (GOL) to the Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m still working on explaining the other sells and buys announced on January 18 from that group.

Shares of GOL Linhas Aereas Inteligentes (GOL) continue to close in on the June 29, 2010 low at $11.7182. Even yesterday’s solid report on May traffic couldn’t keep the stock of Brazil’s low cost airline out of the red. Today, of course, they’re up on the global bounce but I’m not sure how long that will last.

May traffic, GOL reported yesterday June 13, climbed by 12.7%. The company recorded 2.44 billion revenue-passenger kilometers in May, up from 2.17 billion in May 2010. (A revenue-passenger kilometer is calculated by multiplying the number of paying passengers by the number of kilometers flown.)

GOL’s load factor—the percentage of available seats that are occupied—climbed to 62.9% in May from 57.9% in May 2010.

The problem for GOL—as for all the world’s airlines—is higher fuel prices. Read more

Update Vale (VALE)

You’d think news that the Brazilian government is so eager for Vale (VALE) to get into the rare earth business that it was busy lining up potential customers would be nothing but good news for Vale. (Vale is a member of my Jubak Picks 50 long-term portfolio http://jubakpicks.com/jubak-picks-50/ )

You’d be wrong, however.

The move by the Brazilian government has added to fears that it wants to regain control of the company that it privatized in 1997. Government pressure was key to pushing out Vale CEO Roger Agnelli in April. Financial markets have generally reacted favorably to new CEO Murilo Ferreira, a Vale veteran who left the company in 2008, seeing him as an experienced mining executive rather than a political appointee.

But the jury is still out. The new government of President Dilma Rousseff has made moves to reassert control over Petrobras, also a partially privatized government-controlled company, and recently moved to impose price controls in the Brazilian ethanol industry. It’s clear from government negotiations with companies like China’s Foxconn, the maker of Apple’s iPhone, for a potential $12 billion investment in Brazil, that the government wants to foster a Brazilian technology industry. Being able to promise technology companies access to a supply of rare earth minerals at a time when China, the source of 90% of global supply, is restricting exports, would be a major boost to that effort.

The question for investors, of course, would be “Is this investment in Vale’s interest or are we headed back to the days when the government ran the mining company in the national interest?”

At this point it’s hard to tell for at least two reasons. Read more

What to do if you own shares of Cosan (CZZ in New York or CSAN3.BZ in Sao Paulo)? Brazil’s big sugar and ethanol producer is getting hit with a double whammy of drought and a steeply appreciating Brazilian real that have reduced profits in a big way. For the quarter that ended on December 31, 2010, Cosan’s earnings fell by 20% from the same quarter a year earlier. Shares traded at $11.44 in New York at 12:30 on May 25. That’s down from $14.57 on January 4, 2011.

It’s hard to see either of these two factors turning around quickly. Right now the market believes that the Brazilian 2011-2012 sugar crop looks to be only marginally better than the 2010-2011 crop. A weakening in the Brazilian real will probably have to wait until the Federal Reserve starts to raise interest rates at the end of 2011 or in early 2012.

But you do know that the sugar supply problem will get resolved with a turn in the weather and that the real will—probably—weaken once U.S. interest rates start to rise (and when the Banco Central do Brasil stops raising interest rates in Brazil in late 2011 or early 2012.) If you were a value investor and didn’t own any of these shares, this is exactly when you’d be thinking about buying the stock on current weakness and future prospects. (Or you might wait six months or so.) Of course, if you do own it—and I have in my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ since November 12, 2010—this is exactly when you want to throw up your hands and sell.

I think that emotional reaction is understandable but either premature or wrong. At the least, I think it’s worth waiting for the correction in emerging markets to work its way through the system. With a general recovery in Brazilian shares because of an end to this correction, I think Cosan is worth $15 a share. That’s roughly a 35% gain from here. I still see an end to the emerging market correction in the last half of 2011 and I’m willing to wait that long.

Am I willing to wait longer?

Let’s take a look in more detail at what’s been going on at Cosan. Read more

Cheap gas tomorrow and cheap gas yesterday but no gas at any price today.

Turns out there are worse things than $4 a gallon gasoline.

For instance, there’s driving up to the pump and discovering that there is no gas for sale. Energy shortages are happening across a big swath of the developing world. And it’s occurring not just with gasoline but also with diesel fuel and even electricity.

The reason is very simple: Governments from Russia or China to India to Indonesia to Brazil have pressured or required oil refineries (and other energy companies) to keep consumer prices low even though the costs that they’re paying for oil (and coal) are rising. That’s turned these companies from oil refineries into red ink machines. Not surprisingly they’re reacting to these economics by cutting production– if you lose money on every sale, you’re going to cut volume. Or by exporting gasoline to countries that pay market prices for their petroleum products. And that has resulted in massive shortages of everything from gasoline to diesel fuel to electricity.

The shortages have become large enough to potentially cut economic growth in the economies that the world increasingly counts on for growth—just as central banks are raising interest rates in these economies to slow growth in an effort to fight inflation.

I’d argue that despite all the worry on Wall Street about how higher U.S. energy prices will hurt the U.S. economic recovery, the biggest danger to economic growth from higher oil prices is in those developing economies that are now caught trying to control prices without squashing supply.

Russia, the world’s biggest oil producer, is a good example of how a developing economy can get caught between a rock and a hard place by rising energy prices  Read more