Sao Paulo Value: Global Investment Ideas from Brazil by Arthur O'Keefe

Keep your eye on currencies

The above is EURUSD as seen through Oanda’s fxTrade platform. Oanda’s platform is freeand is an excellent tool. From what I can figure out, I think it shares the same back end asUBS’s professional currency trading platform - so it is of institutional quality.Below is the FXE (EURUSD ETF) vs S&P:

Sunday, May 30, 2010

Go to home Go to archiveSão Paulo Value by Arthur O’Keefe art@spvalue.com http://www.spvalue.com

São Paulo Value: EURUSD is still the Key

Last week saw a head-fake that looked at first like EUR was going to outperform the S&P(how is that even possible??? - note sell any outperformance of EUR to the S&P) and then acouple of instances where it looked like the S&P was going to break away from EUR butfailed. I think S&P will eventually strip away from EUR, but probably not while North Koreamay go to war or while people are discussing dropping a nuclear weapon on the seabed of the Gulf of Mexico to stop an oil leak.So not much to report. Value has showed up again in small cap high cash flow companies -names like AIPC, RKT, RSH as well as high quality companies - you’ve basically gotten 6months of growth in WMT for free at the price it is today, but there is some severedeflationary events (sovereign defaults in Europe) and horrible technicals (is there any retailinvestment left in the stock market and will it ever come back with this volatility?) that it’s quitepossible that “good deals” can persist for a while and get even better.Thus, this is not the environment to stretch or lever up. Buy “high quality” shorter dated highyield (Brazilian USD denominated debt is interesting at these levels) and nibble at high cashflow stocks using existing cash flow from other sources (dividends, coupons, and operationalbusinesses/personal income) to add slowly. High quality companies should prove to be ahedge when inflation eventually comes back (looks like it will be 2 years away minimum atthis point).In my opinion, this is an incredibly challenging environment to invest in. As the title suggests,keep your eye on currencies to understand what’s happening. That is the driving risk factor right now from every number that I’ve looked at. The equity and debt markets are respondingto currency/capital flows and liquidity constraints driven by these flows. So until we seestability in the currency markets (and we are not seeing that yet) we will not see a bull marketin my opinion.So to close, here are some interesting thoughts from the St. Louis Fed Monetary Trends Juneedition:First the Title: “Why Do People Dislike Inflation?”-Can there be any debate of the Fed’s wishes with a question like that?Nevertheless, looking at the aggregate stats I don’t think they are successful or are likely tobe successful in the near term:

I see signs of recovery but that’s expected given the large amount of stimulus pumped intothe economy. Considering this and the huge amount of slack between employment andcapacity utilization, I don’t see how we can have inflation.This will help support the dollar, which apparently is bearish for the stock market (empirically),so no rush. Good deals should persist and cash flow is a must in my opinion.Try not to lose money.Arthur O’Keefe, São Paulo Valuehttp://www.spvalue.comnext >< previous

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