Invest in Brazil?

Brazil has the seventh largest economy in the world and the fifth largest as measured by land mass. With a population of 193 million and a 2 trillion dollar economy, it is a political and economic leader in Latin America. However, social and economic problems have kept it from being an effective global power. In the future, economic growth may drastically change the role of Brazil in our world.

Why Invest in Brazil

The booming global demand for commodities, particularly energy and agriculture, is a major proponent of a robust Brazilian economy. Brazil is now a global power in natural resources and agriculture; two of my top global investment trends that I expect to enjoy strategic advantages for decades to come.

Brazilian exports are booming; and include aircraft, electrical equipment, automobiles, ethanol, textiles, footwear, iron ore, steel, coffee, orange juice, soybeans, and beef. It can meet growing demand for its’ products with an ample and efficient work force at competitive prices. Billions of dollars in infrastructure investment is currently benefiting the country as they prepare to host both the 2014 World Cup and the 2016 Olympics.

Brazil has been increasing its’ presence in international financial and commodities markets and is perfectly situated to take advantage of global growth trends. Many financial experts include Brazil in their risk on risk off trading. This means Brazil is considered a major player in world growth. Therefore, when investors want to invest in global growth, they should have Brazil as a part of their asset allocation.

Invest in Brazil Stocks with ETFs

Investing in Brazil Stocks through ETFs is how most investors should invest in Brazil. Since diversification is always paramount to reduce risk; an Exchange Traded Fund (ETF) is the most cost effective means to invest in Brazil. Here are ETFs traded in the United States:

Brazil ETFs based on Market Capitalization:

Ishares MSCI Brazil Fund ETF (EWZ)

Global X Brazil Mid Cap ETF (BRAZ)

Market Vectors Brazil Small-Cap (BRF)

MSCI Brazil Small-Cap Index Fund (EWZS)

 

Brazil Sector ETFs –

EGS INDXX Brazil Infrastructure ETF (BRXX)

Global X Brazil Consumer ETF (BRAQ)

Global X Financials ETF (BRAF)

 

Brazil Leveraged ETFs -

ProShares Ultra MSCI Brazil ETF (UBR)

ProShares Ultra Short MSCI Brazil ETF (BZQ)

 

Investing in Brazil

Brazil is well positioned to participate in global growth trends. Investors who want to participate in growth of the Brazilian economy can invest in Brazil stocks through a variety of Brazil ETFs.

(Disclosure: The Arbor Asset Allocation Model Portfolio (AAAMP) has a 1.3% position in BRF and 1.2% position in EWZ; no positions in BRAZ, EWZS, BRXX, BRAQ, BRAF, UBR, or BZQ on 2/12/12.)

 

Bank Stocks

Bank stocks are no longer investments for “widows and orphans”, but are instead, high risk investments with erratic dividends. Their volatility and undependable dividend payouts are symptoms of long term problems for the banking system.

In our last post we looked at why investors should Avoid Value ETFs and Mutual Funds. I pointed out that value ETFs and mutual funds are loaded with financial services stocks that used to be safe dividend paying stocks but are now high risk investments.

Bank stocks are large percentages of many value stock portfolios; and are being considered for purchase by individual investors because they can be bought for a fraction of the price they traded for a few years ago. I have avoided bank stocks for many years and, after careful examination, will not be adding any now either. Here is my analysis.

We know that most bank stocks have been volatile and poor investments the last few years. I’m not saying these investments won’t have periods in which they do well. If a stock falls from $50 to $2 and then rises to $4; I realize if you buy at $2 you have a 100% gain. My point is you need to realize what you are buying. Are you looking for a trading opportunity or a long term investment? While banks stocks used to provide security, dividend income, and moderate consistent growth; there are plenty of reasons to believe those days are over.

Long Term Problems for Bank Stocks

Let’s look at the long term problems of the banking system that make bank stocks high risk investments for the foreseeable future:

Political Risks – Everyone hates the banks right now

Failing Mortgages – Still millions of underwater mortgages on the books (and more coming!).

Deflation – Housing prices are still falling!

 

Litigation and Settlement costs over mortgage putbacks.

Regulatory reforms adding costs and making loans harder to make.

Exposure to Europe.

Lack of Transparency – What exposure do they have to derivatives?

When Interest Rates Rise – Banks are getting a free bailout from the Federal Reserve artificially holding down rates. What happens when rates rise?

Balance Sheets need improvement as requirements for additional capital make lending harder and less profitable.

Lack of Credit Growth – Banks have thrived for decades on ever expanding credit. Credit is shrinking now.

Does This Mean You Shouldn’t Buy Bank Stocks?

The point of this post is not to keep you from buying bank stocks. Everyone has their own personal risk parameters. There may be a price where it’s worth the risk to own a particular stock. The point of this article is that bank stocks are a completely different investment from what they were in the past. They are no longer steady dividend investments for “widows and orphans”.

Bank stocks are high risk investments with erratic dividends because the banking system environment has changed. Be sure you understand the risks, and possible rewards, before making an investment.

 

Global Trends

These top global investment trends should be considered for your portfolio in 2012. Each trend has strategic advantages driven by global demand. All have the potential to provide superior returns on investment that can transform a portfolio from average to extraordinary.

Following is a summary of each trend with a link to a more in depth analysis of the individual investment trend.

 

Top Global Investment Trends

Dividend Income Investing

Investors are hunting for yield, and dividend income investing is becoming their choice. Short term rates are at historic lows and the Federal Reserve is promising to keep them low for an extended period of time. Baby boomers are reaching the age where the need for income is becoming more critical. A long term view including considering yield, potential increases in the dividend over time, and valuations should be a part of hunting for yield.

Investments in Infrastructure

No state or nation is able to thrive without Infrastructure Investments in Energy, Transportation, Communications, & Utilities to support growing economies and populations. Airports, railroads, highways, communications, and energy are all needed to move people, products, and information efficiently. Developed countries have old and neglected infrastructure needs. Emerging markets have unending needs for new infrastructure.

Food and Nutrition

As emerging and frontier market economies develop they require Investment in Food, Nutrition, and Agriculture. This process is already under way as consumers demand more meat and higher quality food as incomes rise. Add world population growth and you have ever increasing demand for good nutrition and quality food for decades to come.  

Environment Services

The global trends are increasing demand for Environmental Management Services and Sustainability. These trends are being propelled by rapid population growth in developing and frontier markets, higher standard of living being demanded by emerging countries, and the sheer volume of resources consumed in the developed nations. The costs and resources needed are huge and require capital for investment.

Energy Investments

Invest in Energy Stocks for Inflation Hedge and Growing Dividends. Whether we are talking about oil, natural gas, coal, nuclear energy, or new green energy, we will probably need it all. We already use all the energy we produce worldwide. The tremendous growth expected in the standard of living of the emerging markets, in addition to worldwide increase in population, will force us to find more ways to produce and deliver energy to an energy starved world.

Defense Spending, War and Terrorism

Defense Stocks: Stable Growth Companies and High Dividend Yields. We live in a dangerous world. Trends that include an increasing number of fanatics willing to kill innocent people will require technology and diligence to defeat. Add to the fact that as we have become more global and mobile we need more resources to keep the peace, not less.  The expected cut in military spending has provided an opportunity to buy defense stocks at bargain prices. If history is any guide the cuts will probably be much less than anticipated and future allocations to global defense will have to increase.

Demand is Driving Global Trends

Each of these six global investment trends have the potential to provide extraordinary investment returns because the demand created by the global market place will require these needs to be met. If you have demand that outstrips supply, the return on investing in that product or service will have to be higher than average to attract investors into investing and meeting that need. 

Would you add any global investment trends to my list? 

Savings Bonds

I-Bonds Purchase Limit Increased to $10,000

The annual purchase limit for government savings I-Bonds has been raised to $10,000; making them more attractive to investors. In the current low interest rate environment people are looking for yield, safety, and inflation protection for the savings. I-Bonds can provide all three.

What are I-Bonds?

I-Series Bonds are issued in electronic form by the U.S. Treasury and backed by the full faith and credit of the United States Government. The interest rate varies every 6 months based on a fixed rate set when the bond is issued, plus the annual inflation rate measured by the Consumer Price Index. The current rate from November 2011 to April 2012 is 3.06% based on a fixed rate of 0.0%

Advantages of I-Bonds

Small Minimum Investment –  May be purchased in any amount starting at $25.00

Inflation Protection – because the bonds are indexed to the Consumer Price Index your savings have some inflation protection.

Favorable Tax Treatment – I-Bonds pay no state or local taxes. Federal Taxes can be deferred until redemption or paid annually. No Federal  taxes are due on interest used to pay qualified higher educational expenses.

Safety – United States obligations are considered the safest in the world.

Avoid Fees and Commissions – There are no account fees or commissions, even for small purchases.

Disadvantages of I-Bonds

Maximum Purchases – I-Bonds are limited to purchases of $10,000 per year.

Minimum Holding Period – I-Bonds must be held for at least 1 year.

Interest Penalty – Bonds held less than 5 years will suffer a 3 month interest penalty.

How to Buy I-Bonds

I-Bonds are available only in electronic form from the Treasury Direct. Open an account at Treasury Direct. You will need a Tax I.D. number (SS or EIN), e-mail address, and bank account including routing number. Once your account is set up it’s easy to add to your account, even in small increments.

Government Savings I-Bonds should be considered as a savings option because of safety, competitive rates, small minimums, and inflation protection.

Gold: Investment or Store of Value

Is investing in gold a good or wise investment? I think it depends on why you are buying the precious metal. You need to ask yourself; is gold an investment or a store of value? 

What is an investment?

There are many definitions for investment but I like to use the economic definition because I believe it gives clarity to my point. An investment is an amount set aside for future production; consumption is delayed in order to use the resources for future production or benefits.

Some may choose to use a broader definition of investment that includes speculation on asset prices. As an investor you will be better off to distinguish between the two kinds of expenditures.

If an asset provides cash flow, dividends, or rent; the value of the asset is dependent upon those benefits produced. How do you value an asset that produces no economic benefit? You must hope that someone else is willing to pay more for that asset than you did. Is this a wise investment or a hopeful speculation?

What is a Store of Value?

Any physical asset can be considered a store of value if it has value as a medium of exchange, can be stored, and can be reclaimed at a later time. What is considered a store of value can be different around the world. What might be of value to one society might hold little or no value to another.

Gold is a commodity that would be considered of value almost anywhere in the world. Given the fact it is one of the rarest substances on earth and is easily stored; Gold is an excellent example of a good store of value.

Why Do You Want to Buy Gold?

Do you want to buy gold as an investment because it’s going up and others are making profits?  Or do you believe your finances call for having a portion of your net worth as a store of value? If it’s the latter, that is a decision you can make and feel comfortable with it! If it’s the first then you should consider other options. Buying an asset with no cash flow because you believe someone will pay more at a later time is speculation or gambling; not sound investing.

Buying Gold as a Store of Value

Investors with a high net worth may choose investing in alternative asset investments; including holding gold directly as a store of value realizing it is not a good investment. To me, it does not make sense for small investors to buy gold directly as a store of value. What is a thousand or even ten-thousand dollars of gold going to do for you? In small lots you will have high commissions, high bid/ask spreads, and high costs to hold (storage, delivery, security, etc.)

Investing in Gold Stocks and ETFs as an Investment

The average investor who wants to participate in gold investing should consider assets that create cash flow. Gold mining shares and ETFs provide the opportunity to invest in gold indirectly through an entity that is actually an investment. In addition, stocks and ETF investments are easily traded with low commissions; small bid/ask spreads, and zero additional cost to hold.

Investing directly in gold should be reserved for investors who want a store of value. Investing indirectly in gold through individual stocks and ETFs is the best way for those who are looking for a good investment in gold.

 

Risk ONN, Risk OFF

Simply put, the Risk On, Risk Off Trade is based on the tug of war between inflationary and deflationary forces. Since 2008 there has been a trend towards higher asset correlations which can be, at least partially, attributed to the risk on, risk off trade. Apparently UBS feels there is interest from investors to have trading vehicles that will track the movement of these assets because they have launched two new ETNs that will do just that.

On December 1^st two ETNs, the ETRACS Fisher-Gartman Risk On ETN (ONN) and ETRACS Fisher-Gartman Risk Off ETN (OFF) began trading, giving investors a trading vehicle to participate in this relatively new phenomenon. But should investors participate?

Risk On, Risk Off ETN Advantages:

Both ETNs:

• Have long and short positions (depending on Risk (ONN), or Risk (OFF)) in equities, bonds, currencies, energy, agriculture, and metals in one convenient vehicle.
• Possibly provide protection from Inflation (ONN) or Deflation (OFF).
• Are leveraged and therefore provide greater beta (volatility) than the stock market.
• Provide diversification by being long or short 35 different investments in one simple trade.

Risk On, Risk Off ETN Disadvantages

Both ETNs:

• Have tracking fees that lower returns (0.85% for Risk (ONN) and 1.15% for Risk (OFF)).
• Employ leverage that increases volatility and risk.
• Have no track record. The index itself was just begun in November.
• Investments in the index may behave differently in the future than in the past.

Risk On, Risk Off Trading

These new investment ETNs are an alternative asset investment and provide investors a convenient vehicle to implement a comprehensive Risk On, Risk Off strategy.  But should you? These are really trading vehicles, not investing vehicles. If used wisely, they could be an excellent hedging strategy for the sophisticated investor. But for most investors there is little need to take on the disadvantages and risks of owning such an exotic instrument. Before considering using these instruments, even as a hedge, I would certainly want a longer track record. Most investors should concentrate on quality investments, diversification, and most importantly a proper asset allocation for their portfolio.