SAO PAULO, April 29 (Reuters) – Concerns over a slump in commodity prices may weigh on Brazil’s benchmark stock index and currency in the near term, hedge fund managers said on Tuesday.
Brazil may be able to weather a recession in the United States since local demand has been the main driver of the economy’s recent expansion.
But Brazil’s markets are vulnerable to a downturn in commodity prices caused by a U.S. slowdown as the country’s Bovespa index .BVSP is heavily weighted in metals, oil and steel companies.
“There isn’t a direct effect of the U.S. crisis, but the risk is commodity prices since a big part of the Bovespa index is commodities,” Enio Shinohara, a partner at Claritas Investments, a Brazilian hedge fund with about $1.1 billion in assets, said at a seminar.
Brazil has been partially insulated from the crisis in the U.S. economy and in credit markets because prices of iron ore, oil, soybeans and other agricultural commodities have surged to record highs.
The Bovespa index, which soared 43 percent last year, has edged down 0.1 percent so far in 2008, contrasting with a slump in emerging market countries such as China and India as well as major markets in the United States and Europe.
The high commodity prices helped increase the inflows of dollars from exports and fueled investors’ appetite for companies such as iron ore and metals miner Vale (VALE5.SA: Quote, Profile, Research) and oil giant Petrobras (PETR4.SA: Quote, Profile, Research).
But analysts said the surge in commodity prices may have been overdone, raising concerns that a decline in prices will have a direct impact on the Bovespa index.
One of the enduring mysteries of our times is how China has created capitalism out of thin air. Massachusetts Institute of Technology economist, Yasheng Huang, lifts the last iron curtain.
Throughout history, countries have needed to secure private- property rights and impose limits on state power in order for entrepreneurs to take risks, for bankers to lend money to people other than the king’s cousin and for economies to grow.
Not communist China.
The spectacular success of the Chinese economy in the past two decades seems to suggest to many analysts that good institutions may not really be as fundamentally important to a country as they are cracked up to be.
This isn’t an idle, academic debate.
Our perception of what makes China successful has serious implications for how we analyze the prospects for the rest of the developing world.
Most of us may believe that Robert Mugabe’s undermining of democracy is bad news for Zimbabwe’s economy.
But if we conclude that China created material prosperity and spawned wildly successful entrepreneurial ventures such as computer maker Lenovo Group Ltd. without constitutional democracy and its appurtenances, then we can’t — at least on purely economic grounds — argue that Zimbabwe needs them.
Equally useless then would be the heaps of empirical evidence that economists have uncovered suggesting a causal relationship between property rights and growth.
If the most fascinating economic miracle of our times can soar in an institutional vacuum, then surely others can, too.
Stuck Needle
Now, that may only sound right to Mugabe and his cronies. So what’s missing here?
The answer, according to Massachusetts Institute of Technology economist Yasheng Huang, is simple: The conventional view of China is deeply flawed.
Remember when you were a kid, before you’d developed any kind of decent sense of humor, and you’d hear the laugh track on sitcoms and just chortle along maniacally, like you’d actually got the joke…even though you didn’t? No? OK, that’s an overshare. But still, it occurs to us that the Fed, if it cuts rates today – as is widely expected – would be guilty of the same thing. Laughing because you’re being cued in by a machine is absurd. But at least it’s harmless. Cutting rates because it’s all you can do, despite the fact that you know that the dollar will fall and energy prices will rise and you have no idea, what, if anything, the upside will be, is nothing short of a mystery. Here, the best explanation we can find of what happens if the Fed sprinkles its fairy dust at 2:15 p.m. today.
Federal Reserve Chairman Ben S. Bernanke may need to step up his effort to unfreeze bank funding markets as a surge in borrowing costs blunts the impact of the cash auctions the central bank introduced in December.
The cost of obtaining funds for three months has risen by 0.33 percentage point since the Federal Open Market Committee’s last meeting on March 18. The jump may force homeowners with variable-rate mortgages and some companies to pay more on their loans at a time when economic growth is faltering.
Policy makers may discuss the results of the $100 billion-a- month Term Auction Facility when they gather for the second day of their two-day meeting in Washington to set interest rates. The central bank will probably increase the size and duration of its biweekly auctions, according to economists at Barclays Capital Inc. and other firms.
“There’s clearly a need for the Fed to do more,” said Charles Lieberman, a former New York Fed economist who’s now chief investment officer of Advisors Capital Management LLC in Paramus, New Jersey. “The underlying problem” is that banks and other investors are “still nervous” about lending to each other, he said.
The FOMC may also lower its benchmark rate by a quarter point, to 2 percent, as officials attempt to spur economic growth. Traders anticipate the central bank will then take a breather from its series of rate cuts, futures prices show. Today’s statement is scheduled for around 2:15 p.m.
Today I have a pleasant surprise to receive a long distance call from London, and more surprised it was from Sandy Jadeja who acted as Moderator for the Panel of Speakers at Mumbai ATIC that I wrote about earlier.
As I sounded tired, he cheered me with this collection of thoughts which are so beautiful to share with all.
Quote:
“Fulfillment is not a matter of doing more. It is a matter of focusing who you are,
what you have and the actions you are already taking.
Fulfillment flows from focusing your life around specific and authentically held intentions.
When the intention is clear, consistent and meaningful, you already have sufficient
means to bring it about.
Though you will surely cross through formidable challenges, fulfillment is not a struggle.
Rather, it is a unique and magnificent expression which receives its nourishment from
those very challenges.
Fulfillment brings the ineffable treasures inside of you to the surface and beyond, where
they manifest as great value. Fulfillment is a medium through which you intimately interact
with all of life, strengthening the presence of joy in the process.
The fulfillment of your most profound desires is always present in your life. By your
continual thankfulness for what is, you allow and enable the fulfillment of what can be.
See the beauty, feel the joy, and keep your thoughts filled with the most positive and
meaningful possibilities. For fulfillment never ceases.”
Followed by another: Quote
Frame of life
The way you frame your life has a major impact on the way your life unfolds.
The way you see yourself and your place in the world determines who you truly are.
The unstated assumptions upon which you rely are constantly exerting their influence.
Your deepest, most sincere feelings about life have a way of coloring every circumstance.
The events in your world do not just happen without reason or source. They are driven by
your most fundamental expectations of how you will find life to be.
In each small moment and in every large undertaking, your frame of life sets the stage. So
choose to frame your life with love, with respect, with beauty, grace and a focus on the
most magnificent possibilities.
The way you see the world determines the kind of world you see. So decide to assume, expect
and look for the very best you can imagine.
Live with a positive, enthusiastic and thankful frame of life. And within that empowering frame,
you will create a masterpiece that grows more beautiful with each moment.Unquote
The purpose of this entry is not to talk about the markets but to pose the question: what are you going to do about it if this turn of events comes to pass?
This is not an issue for the professional trader – he just keeps doing what he keeps doing. However, the retail trader is not in the same position.
One of the blind spots of retail traders is they often act as if the conclusions they make about the market is divorced from day to day living. It’s as if what they see in the charts applies only to their trading activities. And yet. if the recession proves to be as deep and prolonged as expected, it will impact our day-to-day living. So the question I’d pose is: what are you doing to protect yourself in the event the recession does eventuate.
The reality is you need to take reflect, plan and execute now – not when the effects are upon us. Of course, I could be wrong – there may be no recession. So in our planning, we’d plan to ’scale in’: as the evidence grows, we increase our protective measures.
(Fortune Magazine) — In two bestselling books, “Fooled by Randomness” and “The Black Swan,” Nassim Nicholas Taleb has explored the ways people misunderstand randomness and risk. At the heart of his thinking is the idea of a “Black Swan” – an unlikely but not impossible catastrophe that no one ever seems to plan for. In an e-mail and telephone exchange with Fortune’s Eric Gelman that began with Taleb in the Yucatán for the equinox, the New York City-based former trader turned scholar and essayist expounds on the role of Black Swans in the current market crisis.
What is a Black Swan?
What I call a Black Swan is a surprise event – like the discovery of the black bird in Australia, which was unpredictable because swans in the Old World were all white. But unlike the bird, my Black Swan carries large consequences.
There are two types of businesses: those that are exposed to Black Swans and those that are relatively insulated from them – not because Black Swans cannot occur, but because their impact is not going to be monstrous. Your dentist’s income will not disappear on a single day: No single event will carry big consequences for her. But trading profits can all be lost by a single transaction. So some businesses are insulated, some (like technology) are exposed to positive Black Swans, and others are exposed to negative ones.
Most people seem to have been caught off-guard by the subprime crisis, yet such an event was not only predictable but also inevitable. It was a Black Swan, yes?
The Black Swan is a matter of perspective. A turkey is fed for 1,000 days – every day lulling it more and more into the feeling that the human feeders are acting in its best interest. Except that on the 1,001st day, the butcher shows up and there is a surprise. The surprise is for the turkey, not the butcher. Anyone who knows anything about the history of banking (or remembers the 1982 Latin American debt crisis or the 1990s savings and loan collapse) will tell you that the subprime crisis was so bound to happen. Banks are exposed to such blowups. Bankers have been the turkey, historically.
So I call these crises “gray swans.” I’ve been telling anyone willing to listen that banks have a tendency to sit on time bombs while convincing themselves that they are conservative and nonvolatile.
I gather you don’t have a lot of respect for the effectiveness of Wall Street’s “risk management.”
It is the “science” of risk management that effectively turned everyone involved into a turkey. If the Food and Drug Administration monitored the business of risk management as rigorously as it monitored drugs, many of these “scientists” would be arrested for endangering us. We replaced so much experience and common sense with “models” that work worse than astrology, because they assume that the Black Swan does not exist.
Trying to model something that escapes modelization is the heart of the problem. We like models because they do not require experience and can be taught by a 33-year-old assistant professor. Sometimes you need to say, “No model is better than a faulty model” – like no medicine is better than the advice of an unqualified doctor, and no drug is better than any drug.
The idea that catastrophe can strike without warning does not seem particularly hard to understand. Why doesn’t Wall Street ever seem to allow for that possibility? And why doesn’t it learn from past catastrophes?
Let me blame business schools and the financial economics establishment – they have a vested interest in promoting models and devaluing common sense.
I worked on Wall Street for close to two decades in trading and risk management of derivatives. I noticed that while portfolio models got worse and worse in tracking reality, their use kept increasing as if nothing was happening. Why? Because in the past 15 years business schools accelerated their teaching of portfolio theory as a replacement for our experiences. It looks like science, and they have been brainwashing more than 100,000 students a year. There is no way my experiences can be transmitted to the next generation because of these schools. We’ve had fiascoes in finance that they need to neglect because they contradict their models. The problem may also be the Nobel in economics that gave a stamp to these junky theories. Someone needs to make the Nobel committee account for this, for the damage to society – and I hope to do so.
Banks thought they were hedging their bets in the mortgage market. Clearly they were wrong. Would there have been a way to participate in the mortgage bond market in a prudent way?
Of course, in a less leveraged manner. But greed pushes bankers to take the maximum amount of “hidden risks” – those risks that do not show on a regular basis because the models miss it, but end up causing blowups. Banking is a very treacherous business because you don’t realize it is risky until it is too late. It is like calm waters that deliver huge storms.
You can tell that there will be another blow-up, another Black Swan, but you can’t tell me where it will occur – or can you?
I don’t know where it may occur. But if you look at balance sheets and contingent liabilities, it is easy to know who may be exposed to negative ones and who may be exposed to positive ones. Furthermore, some banks and hedge funds are more resistant than others to the Black Swan – we need to discriminate between them.
Is there any way to prevent drastic shocks to the financial system?
Occasional blowups are good if they are small and recurrent. When you live in Manhattan, you notice the quality of the food is high because restaurants are rapidly punished for their mistakes. But unfortunately we have been experiencing the opposite: rare but deep and systemic blowups.
Is there something fundamentally wrong with the structure of the U.S. financial system? What can be done to fix it?
In the past, the financial world had a very diversified ecology: banks going bust on a steady basis. They were not all homogeneous.
Today the entire banking system is dominated by a few monster banks, and almost all have the same exposures. So the system became less and less volatile while becoming riskier and riskier. So we moved from the more resilient ecology to a more concentrated architecture. I used to say, “You trade with a bank, you end up trading with J.P. Morgan (JPM, Fortune 500).” Well, it turned out to be true with the Bear Stearns (BSC, Fortune 500) rescue.
Did your personal portfolio benefit or suffer from the subprime crisis?
I prefer not to answer that, as I am trying to avoid talking about my nonintellectual activities.
Subscriber NicT has submitted this post which is worth heeding. The bold texts are my comments.
Loeb’s Trading Tactics:
The market is a battlefield. Make sure you are on the winning side
You must trade with the actions of the market and not simply by how you might think the market should trade
Trade what you see not what you would like to see
Knowledge through experience is one trait that separates successful stock market speculators from everyone else
Learning v Performance
To do well in short-term trading, it takes full-time attention and dedication
Short or long ie Swing or Position trading needs detailed planning
Exploit all new trends quickly and aggressively
Enter market at the trigger points that you have strategised.
The best traders are usually psychologists. The worst are usually accountants
Psychologists look at the big picture while Accountants focus on the bottom line and miss the risk to reward, probably.
Stocks act like human beings and go through the same stages and phases as people do, including infancy, growth, maturity, and decline. The key in trading is to be able to recognize which stage the stock is in and to take advantage of that opportunity
Markets are fractal, ie with patterns repeated over a period of time
Successful traders are intelligent, they understand human psychology, they practice pure objectivity, and they have natural quickness
Because they strategize, evaluate with low emotion or read Ayn Rand’s Objectivity, and have the courage to trigger a trade when they see one.
To succeed in trading you must 1) aim high, 2) control the risks, and 3) be unafraid to keep uninvested reserves and be patient
Absolutely
The stock market is more an art than a science and far more complex than most people understand
Because one needs to think with both Left Brain (analysis) and Right Brain (whole picture or be creative).
It takes considerable amount of self-control to trade well
No doubt, about discipline!
The more experienced and successful you become, the less you should diversify
Trading well with a few instruments you have learned offers better probability of success, speaking for myself.
Big money is always made in the market’s leaders
The ability to find high probability trades makes a big difference
The best stocks will always seem overpriced to the majority of investors
Rising stocks which signal a bullish market will have rising prices, but if one were to enter at the right zone, this is sound practice!
Resist the urge and temptation to change your strategy for each and every different market cycle
More importantly, to resist urge and temptation to change your exit without due respect to risk and reward.
Traders should always close a trade when good reasons exist to do so
Yes, when one sees one has made a wrong judgment about the market, it is better to cut and take a small loss.
Tops in stocks usually occur when the advance in price stalls as volume or activity increases, or if the prices decline and the activity increases
When volume goes with increasing prices, it does signal bullishness, and vice versa.
A sell signal occurs when a stock rises sharply on big volume but ends the day at no gain or at a loss
When the price has topped and a reversal is in place
Every new market cycle produces a new list of fresh leaders
Like winners turning losers.
Pyramid your buys – start with an initial position and then add to it only if the trade moves in your favor
Yes, but beware of averaging which can be lethal!
Stocks are always way overvalued in a bull market and way undervalued in a bear market
When one enters at the wrong zones.
Expectation, not the news itself, is what moves the market
True, prior studies will indicate where the market will be, whereas news is often hype over TV and too late as markets have already factored in the ‘news’! because 60% is based on information and 40% is on Intuition.
What everyone else knows is not worth knowing
Herd instinct is lethal!
Three basis elements should be considered when evaluating a stock – 1) quality (fundamentals, liquidity, management), 2) price, and 3) trend (the most important)
All of it. We just got our transcript of Bill O’Reilly (of O’Reilly Factor fame) from last week asking in earnest who controls the price of oil. A collection of some of our favorite questions posed by him to guest John D’agostino (a former Nymex executive and the inspiration for the book “Rigged: The True Story of an Ivy League Kid Who Changed the World of Oil from Wall Street to Dubai.”). O’Reilly: “Now, who’s driving [the price of gasoline]? Is that the greedy sheiks and Hugo Chavez?…Is there a guy who says $121 a barrel?… Somebody has to put the $125 a barrel on the barrel. WHO does it?” Priceless. Now for an update on what Europe’s biggest oil companies have raked in for the first quarter. If you think O’Reilly is beyond belief, take a look at this.
Royal Dutch Shell Plc and BP Plc, Europe’s two largest oil companies, reported record profit after crude surged above $100 a barrel and natural gas prices rose.
Shell had its biggest gain in London trading in almost three years after saying in a statement today that first-quarter net income jumped 25 percent to $9.08 billion. BP rose the most in 5 1/2 years as profit soared 63 percent to $7.62 billion. Excluding changes from holding inventories and one-time items, both companies beat analysts’ estimates.
Oil reached $111.80 a barrel in March as a tumbling dollar spurred investors to buy commodities, while natural gas increased by an average 22 percent. Output rose at Shell and BP, helping to counter falling margins from refining. Crude touched a record $119.93 yesterday in New York.
“What a great set of results,” said Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking. “The numbers are strong on the operational side.” Kenney has a “hold” recommendation for BP and Shell.
Excluding changes from holding inventories and one-time items, Shell’s profit was $7.85 billion, beating the $6.88 billion median estimate of eight analysts surveyed by Bloomberg. BP’s profit on the same basis advanced to $6.49 billion, above the eight-analyst median estimate of $5.26 billion.
Shell A shares in London climbed as much as 6 percent to 2,057 pence, trading at 2,054 pence at 11:06 a.m. local time. BP rose as much as 5.8 percent to 612 pence in London trading and was at 611 pence as of 11:07 a.m.
The gain for Shell was the biggest since July 2005 and for BP, since October 2002
