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Where Does the Money Come From in Latin America?

Looking outside of the United States for long-term investment opportunities may involve more than “regional funds” or multinational companies. Successful investing in other parts of the world will require the long-term investor to become much more familiar with the economies and credit sources in various parts of the world. For example the Inter-American Development Bank had its annual meeting in Medellin, Colombia last week.

Does the Inter-American Development Bank need to increase its lending base?

Press reports and TV out of Colombia this last week noted that a major point of discussion at the Inter-American Development Bank meeting in Medellin, Colombia is whether or not the Inter-American Development Bank 48 nation membership needs to fund the Inter-American Development Bank with more capital.

As anyone watching the news is aware nations throughout the world are pumping money into their banks and economies in general in order to keep businesses going and their people employed. However, poorer countries and regional economies are not able to do this and run the risk in these difficult economic times of severe unemployment and loss of the infrastructure provided by successful businesses.

The Inter-American Development Bank is a primary and last resort source of funding and credit in Latin America. The Inter-American Development Bank was founded after the Second World War at the request of the Organization of American States. Its roll has been to provide funding and credit for infrastructure improvements and social needs for individual nations and regional economies. In these difficult times the Inter-American Development Bank and others often provide the only source of substantial outside revenue for some Latin American companies.

The answer to the question is that the Inter-American Development Bank probably needs to ask its wealthier members to pay more so that commerce and social stability will continue until the recession starts to wane.

Long Term Investment and Inter-American Development Bank Issues

We have talked before about the fact that those with cash reserves, those selling basic necessities, and those with high cost of entry businesses are likely to do reasonable well during the recession. Those with sufficient credit to weather the storm should be included in this group. In parts of each economy only a few businesses may survive in their current form and with their current ownership. Here is where knowledge of the businesses throughout Latin America, for example, comes into play. Here is where familiarity of the sources of credit such as the Inter-American Development Bank comes into play.

Whether it is mining in the Andes or natural gas extraction in Ecuador these companies need funding which often is through local banks backed up with credit by international lending institutions in these times. A little research into who has funding for development projects and whose banks are getting reserve collateral from the likes of the Inter-American Development Bank will allow the long term investor to put his or her money in companies or regional economies that will likely survive the recession. Those who survive will then have the opportunity to expand into economic niches left by those companies that failed.

It is a temptation to only look at local and national news these days but there is and will be action elsewhere. The Internet may be a better source than the national news. Take a look at the Inter-American Development Bank web site, click the English option unless you speak Spanish, French (French Guiana), or Portuguese (Brazil) and do a little reading.


Economic Recovery, Regional Growth, Foreign Stocks and Multinationals in Latin America

In recent years diversification into foreign stocks has paid well for many US investors. Now that the recession has hit home throughout the world it seems almost everyone who did not sell early has taken a loss. What factors will influence regional economic growth and recovery and where?

Whether you are interested in foreign stocks or US multinationals knowing a bit about prospective growth in regional economies will help you target your investments. Here we take a brief look at Latin America.

Economic Perspective

No matter how bad the economic times there will always be a recovery. So, looking at Latin America, which regional economies are ready for growth? Who has money? Where are there free trade areas? Where are things going to get better?

Who Will Have Cash or Access to Credit for Regional Growth?

Not every bank in the world got into sub prime mortgages. In the little country of Panama at the bottom of Central America, for example, the local banks are solvent. The local banks are still just as conservative as before so the government is sponsoring an economic stimulus package to make sure that loans get to the local business community. In 2008 Panama added jobs and its economy grew by about 9%. A composite of economic projections puts Panama’s growth for 2009 a little above 5%, ahead of the regional growth for the rest of Central America.

Where is Regional Growth Less Dependent upon Trade with North America and Europe?

As North America and Europe deal with their own economic problems they import less. Regional growth in parts of Latin America is protected to a degree by three free trade areas.

There are three free trade areas in Latin America. These are the Andean Community, the G-3, and the Mercosur.

The Andean Community has 120 million people (Colombia, Ecuador, Peru, and Bolivia).

The G-3 is now only Colombia and Mexico as Hugo Chavez withdrew Venezuela.

The Mercosur comprises 263 million people and includes Argentina, Brazil, Paraguay, and Uruguay. However Bolivia, Chile, Colombia, Ecuador, and Peru have associate status and Venezuela wants to join.

There is periodic talk of a South American free trade association on the model of the European Community.

One might expect to see South America emerge from the recession stronger and less dependent upon the Northern economies. Whether one does the homework to invest in local stocks, invests in multinationals doing business in South America, or invests in small cap funds taking advantage of regional growth Latin America will like do well coming out of the recession.

Things Are Getting Better in Colombia

A unique situation is Colombia. Colombia is slowly emerging from a forty year nightmare of civil war. Try to find a guide for a visit to Colombia. You cannot. It has been a dangerous place for over a generation. Now note that Colombia is part of each of the free trade groups mentioned above. Also read the news about how Colombia is gradually resolving its civil war.

The demonstrations for peace throughout Colombia last year were reminiscent of the scenes in Czechoslovakia during its “velvet revolution.”

Perhaps the best foreign stock, regional growth bet in Latin America might just be hiding in Colombia which has free trade agreements with countries from Mexico to Argentina.

Regarding US multinationals, investing in regional growth one might look at 3M as well as Proctor and Gamble which are everywhere and Caterpillar which is everywhere there is construction – like the Panama Canal Expansion project. Bechtel, by the way, is in the bidding for building the locks for the “third lane” of the $5.25 Billion Panama Canal Expansion.


Some Homework References for Investment in Green Energy

The government’s stimulus plan has a huge investment in green energy. The standard argument against green energy is that green energy requires subsidies to be competitive with coal and oil. The recent bankruptcy of numerous ethanol plants with the drop in oil prices is a case in point. The counter argument is that the secondary costs related to foreign oil dependency and burning of coal are never counted into the equation when comparing with green energy. Here an expensive war in Iraq is cited as well as the societal costs of pollution. As the country seems to be heading in a green direction we thought we would provide a couple of green references for the long term investor’s consideration.

New Rules May Make Traditional Fuels More Expensive and Green Energy More Competitive

According to press reports the EPA is drafting new rules that make it more costly to build fossil fuel power plants and large, fuel inefficient cars. One is reminded that the Europeans have taxed gasoline heavily for years in order to subsidize mass transit. It would appear that the new administration is taking the issue of a conversion of the country to more green energy very seriously.

A Green Energy Homework Reference

As with all long term investing it is important to do your homework. Here we reference three web sites with green energy information. In Western Minnesota, the University of Minnesota, Morris campus derives half of its electricity and much of its winter heating from green energy sources. A single wind turbine is expected to be paid for in about ten years with the subsequent profits to be sent on scholarships. This green energy project is doing so well that two more turbines are in the planning stage.

Wind Turbine

The wind turbine at the Morris campus of the University of Minnesota generates 5.6 million kilowatt-hours of power each year providing half of the electricity needs for campus buildings. The turbine stands 230 feet high with three blades each 135 feet long on a ridge where average yearly wind speed is 16 miles an hour at 230 feet. According to campus sources the cost savings of total turbine cost, versus local electric costs, will allow for repayment of bonds issued for this project in about ten more years (fifteen total since the start of power generation in 2005). After that the “savings” each year will go toward scholarships. For more green information about their wind turbine visit the Minnesota, Morris green energy website which is morris.umn.edu/green campus.

Biomass Energy Production

The West Central Research and Outreach Center (WCRC) is a part of the University of Minnesota system. This facility runs a “biomass’ facility where the fibrous parts of corn are burned without greenhouse gas production. The facility produces up to 80% of heating and cooling requirements for the University of Minnesota, Morris campus.

The biomass plant is largely a research facility but WCRC (wcroc.cfans.umn.edu/) and Biomass Magazine (biomassmagazine.com/) are excellent basic references for this green energy source.

From the investor’s viewpoint a project has to make money year in and year out in order to be viable. We offer the wind turbine as an example of a project that appears to be paying for itself year in and year out. According to campus sources the “profits” will go to scholarships in a decade but there are anticipated to be profits.

The biomass project appears to rely upon agricultural by-products. As such it will work, as it does, in an agricultural setting. The biomass project, for the investor, primarily has research value. However, if the Obama administration puts money into low cost loans, government guaranteed bonds, etc. more green energy projects such the WCRC biomass project could become profitable for the public sector.

We suggest that when you see the government pumping money into green energy you will see companies racing to put up “green” projects. The websites cited here will be good independent reference points when you are checking the numbers.


Home Builders in the United States Housing Market as the Recession Lifts

The United States housing market has perhaps bottomed out as the recession shows signs of being on the mend. Although United States housing prices are still down substantially from last year they are not dropping month by month. This may be a good time to look at the large home builders. Some of the larger home builders have locked up large tracts of land in prime markets and will be in a favored location as the recession lifts.

We have talked about what stocks will survive a bad recession and have talked about high cost of entry businesses as being protected. Another category is businesses those which have some part of their market locked up with no possible entry of competitors.

Some the of larger United States home builders come to mind such as Horton, Pulte, Lennar, Centex, KB Homes, Centex, Beazer, Hovnanian, Ryland, MDC, and NVR.

Many of these companies have a lock on large tracts of land in prime locations. Many of these United States home builders have taken a really big hit during the recession. However, as the recession lifts and United States housing comes around these folks still have prime land in locations where there is no more land for other home builders.

It may not be that you will want to invest too early in any of these companies but here is where the purchase of call options in home builders in the United States housing market may be a good idea. For a small fee you can lock in part of the anticipated recovery of the United States housing market and not get caught in a market correction before a big move happens in the housing market.

We can assume that the recession will mend sooner or later, as they always do. We can assume that the United States housing market will recover and home builders will get back to work being home builders. The questions are when and how fast will the recovery be, and if there will there be corrections. If you believe that the United States housing market is going to suffer corrections during its recovery from the recession then you want to simply put in a limited order at the price you anticipate and wait for the United States housing market to come to you.

This strategy, like most successful strategies, will take a little homework. Keeping a folder of the big home builders and keeping tabs on which have large reserves of land as well as reasonably solid financials so that they can resume operations when necessary would be a good idea.

In a year or so the recession will be in the past and the focus will be on the future. We suggest that the successful long term investor needs to put his or her self into that future mindset now. Looking at how large United States home builders will come out of the recession in the United States housing market is a good place to start.

Shipping the Economic Recovery

It is interesting reading the web sites touting shipping profits in early 2008 before the recession hit home. Now major carriers are consolidating routes and considering rounding South America to avoid paying Panama Canal Tolls. One of the industries that will rebound when the recession lifts is shipping. Who will be there to reap the profits of a rebounding world economy?

“GE Shipping: A win-win offer for shareholders.”

“United Arab Shipping Company expects strong profit”

These were the headlines heading into 2008 and the following are from 2009 postings.

“UPDATE: Japan Shipping Cos 3Q Profits Sag; Warn FY Outlook”

“Maersk Sees No Improvement In Shipping Volumes”

As early as March of 2008 Maersk Line, the world’s largest ocean shipper, had set up a “Vessel Sharing Agreement” with its two largest competitors, Mediterranean Shipping Company and CMA-CGM on its trans-Pacific routes in order to save money.

Dry bulk shippers are complaining about the toll increases by the Panama Canal Authority for passage through the Panama Canal. These toll increases were announced a couple of years ago and are meant to help pay for the Panama Canal Expansion. However, no one seems to have put a worldwide recession into the calculation. More and more dry bulk shippers are intending to use today’s cheaper diesel fuel to round South America rather than pay the $100,000 or so for the 8 hour passage through the Panama Canal.

So, dry bulk shipping is down. Asia is closing it shipyards. All those port expansions and renovations on the US East coast will probably do well getting infrastructure stimulus money and the folks with cash and the foresight to share routes and reduce costs will survive to sail another day.

For the long term investor it is time to think of which shipping companies, as well as crane manufacturers, ship builders, shipping container manufacturers, etc. will survive the recession and be making profits in 2010 and beyond. Using the half way rule we can expect the stock prices of dry bulk and other shipping companies to go up when the recession is half way done.

Considering that delivery to West Coast ports and rail shipment into the North American interior is quicker than delivery from the East coast it may be time to look at railway stocks too.

DHL has closed it US operations leaving the field to Federal Express and UPS when the recession lightens. Which of these two giants is better equipped to rule when shipping by air freight and ground transport increases when the recovery gains momentum?

With the infrastructure development and overall increase in prosperity in Latin America which of the shippers is better equipped to prosper there, where DHL is still competing.

We can expect, as shipping goes up again, that the shippers will be offering deals to gain market share. Who will benefit from low shipping costs in a couple of years?

As always, what appears to be smart thinking is usually tedious preparation. Edison’s definition of genius as “one percent inspiration and ninety-nine percent perspiration” still applies. It is probably time to start a file on those shipping companies such as Maersk, CMA, etc. Which company has already started to see its stock rebound and which are the recovery sleepers?

May your recovery homework lead to profits.

How Much Cash to Keep as Cash

The United States government will need to borrow around $2.5 Trillion in 2009. A valid concern has been whether anyone would want to buy US treasury notes. The recent auction of $32 Billion in three year notes implies that investors are planning on keeping their money in short term cash instruments. Are these folks anticipating deflation followed by steady inflation of the dollar in later years? So, where do you put your cash in these trying times?

The Stimulus Package and Inflation

Throwing trillions of dollars at the current economic crisis may well be the only way out. Or, as the President implies it may be the only way to keep the US out of a long term depression. Right now the stimulus money is meant to replace currently unavailable credit and encourage spending. Over the long term as credit is freed up and asset values rise the trillions of dollars dumped into the economy may well have been excessive. In that case how much inflation will we see?

It is interesting that the US Treasury brought back 7 year notes and that the three year notes recently sold well. As treasury auctions go forward it may well be that the 3 and 7 year notes will sell well and not the 10 and 30 year notes. That will be the case if investors believe that the dollar will continue its inflationary slide in a few years.

The Economy and Deflation

The US savings rate is going up, finally. For years economists have warned that the poor US savings rate decreased available money for investment and was a problem. Now the US consumer is saving instead of buying and that is a problem as the economy is going into a worse slump. Will the US see deflation such as Japan had in the 1990’s? With poor credit and half the value of the stock market gone cash has resumed its historic importance.

Although folks bought the 3 year notes the interest rates bid were lower than expected. This would seem to indicate that investors merely want their cash in a safe place and that these investors are concerned about deflation and not longer term inflation. When the 10 and 30 year auctions take place we will see a better indication of investor sentiment for longer term inflation versus deflation.

With too much production capacity around the world trying to satisfy too little demand we may see price deflation across the board. That’s great for consumers and bad for workers. The United States reported historically high productivity this last fall. That’s great for competing businesses, great for consumers, and likely to lead to deflation.

As things become less and less costly cash becomes more valuable. In the inflation of the 1970 consumers “invested” in lawn chairs and garden hoses because buying later was always more expensive. Now in deflationary times it makes sense to wait and sit on your cash. But, where do you put your cash? Short term treasury notes will return your money in a few years or, if deflation really takes hold you can sell at a tidy profit.

The Stock Market and Inflation or Deflation

Our opinion, voiced on these pages, is that investment in companies likely to benefit from US infrastructure improvements will pay well in the next years. Whether we see inflation or deflation it still appears that the stimulus money is coming but it takes time to design bridges, water treatment plants, highway improvements, etc. Then there is the bidding, hiring, etc. Experts are saying that local hiring for US infrastructure projects will not result in paychecks for about a year. That means that the increased consumer spending anticipated is a year off. On the other hand the market anticipates. Putting you assets in cash (3 year treasuries) while you research promising stocks is perhaps not a bad idea.

Investing in Solar Energy

According to the Solar Energy Industries Website solar energy power generation capacity grew by 17% in the United States in 2008. Photo cell, photovoltaic, capacity grew by 44%. Solar energy production is a very small portion of national power production with lots of room to grow.

Solar energy has been growing well on its own the last few years but will benefit significantly from economic stimulus monies tagged for infrastructure improvements. The largest use of solar energy collection is passive systems to heat pool water. However, neither that use nor large scale collection and concentration grew much last year. The president has called for 10% of US energy to come from renewable sources by 2012 and 25% by 2025.

It would appear that to some degree renewable energy, including solar energy will have its day. However, solar energy produced by photo cells is more expensive to generate that wind by a factor of three. Nevertheless it is renewable and favored in the current political climate.

Where does that put the long term investor?

It would appear that the government will put money into subsidizing clean energy, including solar energy. If the tax credits and other benefits are long lasting then the long term investor can put his or her money in a project that, albeit subsidized, will provide returns over the years.

The situation with ethanol comes to mind, however. Oil prices were high and everyone was turning their corn into alcohol for addition to gasoline. Money was invested across the Corn Belt in small factories. Then the price of oil dropped and the bottom fell out of the corn for alcohol for fuel market. The question to ask regarding solar energy, wind, biomass and the other types of “clean” and “renewable” energy is if they will retain their political and economic support from administration to administration with subsidies during bad times.

Currently a dozen states have standards for how much of their power generation will be from solar energy. It is not very much. However, that kind of political support, if kept up will protect the investor over the working life of a solar energy project.

Certainly oil prices will go up again as the world pieces together its economic problems. One of the issues for the United States, beside cost of production, will be access to oil. As the economies of India and China grow they not only bid up the price of oil but they will exert their political influence with oil producers to be favored customers. If seen as a United States national security issue the promotion of renewable energy, solar and other, will likely receive support for a long time.

Short Term Trading Profit As Economic Stimulus Promises Long Term Economic Recovery

The Economic Stimulus or Economic Recovery package has been signed into law. The question for many is how soon the economic stimulus will result in an economic recovery. The stock market will try to anticipate the economic recovery. When bits of news, a new law or regulation, or pure rumor pass around there will be flurries of activity as investors try to position themselves for a profit. It will likely be during these times of high trading volume that there will be profits to be made for short term traders.

It will take a year in many cases for employment in US infrastructure work to take place now that the economic stimulus package has been passed. Tax breaks, one time payments into social security and the like will put some money back into the economy sooner but are not likely to bring about economic recovery all by themselves. The coming longer term investment in US infrastructure will create jobs and improve competitiveness which will in turn be more likely to speed economic recovery.

When Will Anticipation of an Economic Recovery Increase Trading Volume?

The question for the short term trader is when the market will start to move with substantial trading volume. Trading programs are more accurate at high volume. Moves can be more substantial at high volume allowing the short term trader to piggy back on the big money as prices swing up and down.

The standard thinking is that half way through a recession the market anticipates an economic recovery and stock prices start to advance. It is likely that this will happen in fits and starts in the current situation as even the President and his advisor are saying that we are in uncharted territory.

Having an appreciation for when the market starts to move will help you make sure you are on line and ready to go. Having your trading plan in place will be essential. If market volume is down it is not a sin to practice simulation trading. When things start to move either in fits and starts or for real the opportunity will arise to jump on the back of the big money and make your profits.

The Economic Recovery, Hard Facts, and Psychology

By in large folks want the economic recovery to work. Market psychology will be to look for some hard facts that will seem to act as predictors of an economic recovery. Looking at the various parts of the economic stimulus package will give you clues of what the big money will be looking for. Individual psychology is the dangerous part at this time. Remember that you do not need to trade when conditions are not right according to your trading plan or the signals from your trading program. Now is the time to take advantage of market psychology and not fall prey to the fear and greed that are the downfall of so many traders.

In short, do your homework, practice your simulation trading, and limit your trades to what fits your trading plan and program. Then be ready for the signals that the market is ready to invest heavily in an anticipated economic recovery.

Which Stocks Will Recover Lost Ground?

The stock market rallied a bit last week making up for lost ground since late last fall. As usual some stocks rallied and some did not. That sounds so simple as to be dumb, but it is the crux of smart long term investing.

The question we pose is which stocks, which stock market sectors, which technologies will not only recover lost ground but will prosper as the world wide economy rights itself. For that matter if we are in for a long term depression the same questions apply.

Growth, Earnings, and Expectations

It may be hard to envision now but in a few years we will have another market surge with another set of reasons given as to why, this time, the bull market will go on forever. Then, of course, we will get another correction.

The market moves based on short and medium term expectations. Stable, slow growing stocks tend not to do as well in bull markets as those expected to grow dramatically over the next months. However, the more stable companies tend to weather the storm better. They tend not to lose all of their value when the market collapses. Now we need to ask ourselves which long term investment stocks will grow over the long term?

Oil and Supporting Businesses

According a New York Times article, “The Great American Drilling Boom,” is over. As the price of oil has dropped people have quit drilling for new oil In fact many with newly found oil are capping the wells, waiting for prices to go up, before they pump again.

Smart shorter term investors got out of the stocks of companies that drill for oil or make the equipment needed for drilling. They got out as oil prices started to drop.

For the long term we have to ask ourselves if oil prices will stay low and if the industrialization of China and India will go away. It seems unlikely that the two big Asian economies are going to decide to go back to a quieter, less prosperous life. Thus, as India and China deal with their own credit problems, create their own stimulus packages, etc. we will likely see their usage of raw materials go up again. Then the mining will restart in Australia and global demand for oil will go up again.

Maybe big oil will find its profits cut but that never seems to happen. There will always be charges to be made for finding, drilling for, transporting, refining, and selling oil products.

Now that prices are down the smart long term investor will look at who has all of those capped wells and look for deals in companies who drill for and/or transport oil and natural gas.

Housing

The other matter is all of those foreclosed mortgages. People need places to live. There is going to be an increasing glut of repossessed homes. Since real estate is location, location, location buying property or stock in companies that buy property in prime locations, renting for the time being, and, then selling as the market moves up in a year or so, looks attractive.

In general very long term investing tends to look at companies that cater to long term human needs, such as food, medicine, fuel, communication and the like. Good or bad times companies dealing in these areas do not disappear and right now probably are selling at a discount.

For Everything There Is a Season and Right Now It Just Might Be Bank Stocks

So, Wells Fargo’s stock went up and everyone is scurrying to see if now is the time to bet on bank stocks. Folks are not buying, yet, but, trading of “calls” was active in banks and other financials.

The point of the long term investor getting into the market at this point is to pick up good stocks cheap. It is to buy before the crowd gets excited and starts buying in droves.

Smart money has been buying calls on traditionally strong stocks for last months. It appears that after Wells Fargo’s stock went up that the hounds are on the scent of banks and other financials.

However, it appears as though no one is really ready to buy bank stocks right now for fear that the banks will have another round of bad news and drop further in price.

So, what do you do if you believe that the stocks of Wells Fargo or Bank of America or Citigroup or JPMorgan will recover and give you nice dividends and capital gains for years once the recession fades?

The first option, if you will pardon the pun, is to purchase a call option on a bank stock. Buy the right to buy the stock at a given price and if the market surges past that price you exercise the option and have an immediate appreciation of your stock and, hopefully, you have purchased an excellent long term bank stock at an excellent price.

The second option is not an option but a limited order. If you believe that Wells Fargo or any other financial will drop in price again you can simply place a limited order for the stock to be executed only if the price drops to your level.

In either case you will purchase the stock at something less than what you hope it will be in a few months. Then, if you have picked a strong company with good management in the new economic environment you will collect your dividends and watch your stock appreciate for years.

The general consensus seems to be that the financial sector is still risky so no one big is buying a lot. Also it appears that a lot of option trading is going on in the Select Sector Financial SPDR (XLF) which is a composite of 80 financials. With people looking to pick up gains on both puts and calls there obviously no consensus about where the market is going, yet.

If your interest is in long term, buy and hold, investments these next months will be great times to pick up good stocks at great prices. Getting back in before most of the market move has happened is the point of buying calls or placing limited market orders. The nice part about both strategies is that you need not sit at a trade station all day worrying when to pull the trigger. If a stock does not move up or down you don’t buy.

In fact, some folks will tell you that long term investors should probably only buy or sell with limited orders. You are going to be in a stock for a long time but there are ups and downs. There is no reason to jump the gun buying or selling and you do not need to watch a stock price all day long. Place a limited order and if the stock comes to you then buy or sell.


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