by Addison Wiggin – March 9, 2011
Two catalysts on the verge of transforming Colombia into an investment hot spot
Abe Cofnas on what's behind the euro's recent strength
A deficit milestone… and an interesting alternative measure
Michael Moore stumbles into the truth… and quickly climbs back out
Readers spout off about our Colombian excursion, free picks and a "sound" currency
“Things must really be bad for you to visit Colombia," a reader writes, helpfully. "The known center for corruption, murder and much more.
“My advice — get out while you can and look elsewhere.”
Indeed, the day we arrived, the Revolutionary Armed Forces of Colombia (FARC) kidnapped 23 oil contractors working for the oil services firm Talisman in the east part of the country. Yesterday, one of the workers escaped and alerted the military, which then rescued 21 others. One of the workers is still missing.
But so far for us, the trip has been quite civilized. Of course, “civilized” a relative term when you’re being driven around a mountainous city of 7.4 million at breakneck speed in a euro tin can called a Chevrolet Optra.
Regardless, as we hurtled around a hair pin turns at nearly 40 miles an hour, one tire in the drainage ditch, we realized we're developing a coherent answer to the questions: Why Colombia, and why now? If anything, we're starting to think we're a little late.
We’ve gotten some critical insight in this regard from the good people at InterBolsa, a brokerage and investment banker that handles nearly 30% of the volume on Colombia’s stock market.
Colombia has two near-term catalysts that make it worth looking at:
The government has reined in the national debt to 39% of GDP. By way of comparison, the United States recently touched 100%. So Colombia has made enough progress that the rating agencies will likely grant Colombia’s government debt the coveted “investment grade” status by July of this year
Colombia’s stock exchange is about to enter an agreement with the Chilean and Peruvian stock exchanges. Each will remain under their current ownership, but each market will become open to investors from the other two countries. When the Nasdaq Nordic was set up to link Scandinavian markets in a similar way, the Norwegian stock market rose 10-fold.
We're also hearing the government and many private companies are ready to begin massive infrastructure projects… oil pipelines, highways, new exploration. We're visiting one company deep into infrastructure here this morning.
The current security strategy got under way with presidency of Alvaro Uribe. And is being continued under the current administration of Juan Manuel Santos. Attacks on infrastructure of the state oil firm Ecopetrol are down from a high of 249 in 2001 to 20 in 2010. Progress, at least.
Kidnappings are down too significantly. We'd give you exact figures, but right now they're in Spanish and we haven't had time to translate them.
The direct action against FARC comes with no small help from the United States; Colombia is the No. 3 recipient of U.S. foreign aid, after Israel and Egypt. (Right, because it's working so well over there, isn't it? Good point.)
Decades ago, the FARC was a fearsome Marxist guerrilla movement backed by Moscow. After the Soviet Union broke up and the easy money dried up, the FARC turned to drug- and gunrunning… and kidnapping. The guerrilla movement merged with Colombia’s drug trade. And found their new occupation far more profitable.
But from the standpoint of the government here, it’s made for a single, larger and easier target.
Most of the change is for the better. A few years ago, the 250-mile drive from the capital Bogota to Medellin was a foolhardy, even life-threatening, endeavor, with modern-day highwaymen all along the way. No more. Cattle farmers can get their animals to market without worry. Oil firms can build pipelines from the fields to the ports. Prospectors are finding new places to mine gold.
“Colombia may be the best economic story in Latin America,” writes Chris Mayer, who's sitting at the bar next to me. “The economy is growing 5% per year and has a large middle class. In just the last six years, foreign investment in Colombia has gone up fourfold, and exports tripled.
“The famous IMD survey recently ranked Colombia second best in Latin America in protecting private property, behind only Chile. And the World Bank rated Colombia third in Latin America in the ‘business friendly’ category, behind only Mexico and Peru.
“The Colombian stock market has been on a tear since the ’08 financial crisis. But valuations remain reasonable, given the high growth rate.” That’s the flip side to our concerns yesterday about Colombia being the most expensive emerging market, going by forward price-to-earnings ratios.
“As a resource story,” Chris continues, “Colombia has huge potential for oil production. There have been a number of success stories already. The stock price in the largest independent oil producer in Colombia, Pacific Rubiales, for instance, is up 10-fold in the last two years!”
The biggest cloud on the economic horizon lies to the east. Next door in Venezuela, our favorite South American dictator Hugo Chavez shut the border and most of the trade with Colombia last year, after Colombia accused Chavez of harboring FARC rebels.
Venezuela was Colombia’s largest export market. In nearly an instant, exports to Venezuela shriveled from $50 billion a year to $1 billion. Efforts are under way to find alternative buyers for Colombian resources, especially in Canada and China.
We’re meeting the CEOs of several companies trying to make that happen in the next few days. Stay tuned.
Oil prices are pulling back slightly, but remain above $105. Apparently, someone at OPEC is whispering sweet nothings in the ears of the financial media about Kuwait, the United Arab Emirates and Nigeria joining forces with Saudi Arabia to fill the supply void left by Libya.
We don’t buy it, any more than we bought the Saudi princes’ assurances. As we pointed out last week, the problem with “spare capacity” is not limited to Saudi Arabia… and whatever spare capacity does exist will likely be gone in two more years.
Instead, we side with our resident geologist, Byron King, who predicts much higher oil prices. If your thoughts align with ours, you can learn how to protect yourself right here.
The dollar hasn’t completely given up its safe haven status yet. After showing weakness despite the turmoil in Libya over the last two weeks, the dollar index is firming this week between 76 and 77.
And that comes despite continued strength in the euro, which makes up well over 50% of the index.
“Newton’s first law of motion essentially states that an object will stay in motion until an outside force moves it,” says our currency specialist Abe Cofnas, by way of a roundabout explanation. “In many ways, currencies follow the same law: A currency price will stay in a pattern until news moves it.
“We saw a perfect example of this principle last week when European Central Bank President Jean-Claude Trichet said that ‘strong vigilance’ on inflation will be part of the bank's policy. This caused a surge in the EURUSD pair. As RBC Capital Markets’ David Watt told the Financial Times, ‘Dollar bears have become a marauding horde.’
“Clearly, there is a bullish dominant sentiment.” On Monday, Abe laid on a play to take advantage of the trend. As with most of his recommendations, readers won’t have to wait long to see how it works out. Abe is your guide to a market that no U.S. advisory service has covered before… in which every play takes five days or less to deliver a gain.
This one-of-a-kind market also gives you ways to play stock indexes, even the Thursday morning report on first-time jobless claims… all playing out in the same five-day time frame. There’s nothing else like it. Give Abe a chance to walk you through it right here.
Uncle Sam just set a record monthly budget deficit — $223 billion in February, according to an estimate from the Congressional Budget Office.
Sort of makes the squabbling in Congress over $60 billion in cuts look a little ridiculous, no?
For what it’s worth, we also checked the Treasury’s figures. According to those, Uncle Sam went $63.7 billion in the red. But a lot of that is clever bookkeeping to try to stay within the $14.29 billion debt ceiling. As of this writing, it’s $14.18 trillion. Just another $110 billion to go…
At the risk of opening a whole new can of worms over Wisconsin, we couldn’t help but notice Michael Moore was opening his fat mouth at a rally in Madison a few days ago.
“Money doesn't grow on trees,” he told the gathered crowd. “It grows when we make things. It grows when we have good jobs with good wages that we use to buy the things we need and thus create more jobs.”
So far, so good. Not sure how a rally for public unions is the place to spout off about the need to "make things" again. But OK…
“Contrary to what those in power would like you to believe… America is not broke. Not by a long shot. The country is awash in wealth and cash. It's just that it's not in your hands. It has been transferred, in the greatest heist in history, from the workers and consumers to the banks and the portfolios of the uber-rich.”
After the era of fictitious capitalism, who are we to disagree?
“For us to admit that we have let a small group of men abscond with and hoard the bulk of the wealth that runs our economy would mean that we'd have to accept the humiliating acknowledgment that we have, indeed, surrendered our precious democracy to the moneyed elite. Wall Street, the banks and the Fortune 500 now run this Republic — and until this past month, the rest of us have felt completely helpless, unable to find a way to do anything about it.”
“If those who have the most money don't pay their fair share of taxes, the state can't function.”
OK, there it is… you won't find us coming to the defense of Lloyd Blankfein, Jamie Dimon, Hank Paulson or any of those jackasses. But when Michael Moore starts deciding how much wealth one “deserves” and what constitutes a “fair share”… watch out. Moore's not mad that the bailouts and stimulus happened. He's just pissed about who the recipients were this time around.
One positive outcome: free entertainment. It's going to be a hoot parsing the rhetoric of statists and unionists alike over the coming years.
“I've been visiting Colombia up to five times a year for the last 18 years,” writes another, who offers some helpful insight into our latest target. “I've witnessed a rather amazing transformation that few other third-world countries have experienced, least of all in a democratic way.
“I've never thought much about the stock market, but I have invested and made money with the oil operators there… they usually trade in Toronto or New York.
“One of the most amazing things about Colombia is the safety issue. I've never had a problem there, even during its worst days. Nowadays, I walk alone at night in Bogota and feel perfectly safe.
“If you need restaurant tips (especially the best steak in town), let me know.”
The 5: Gracias. We’ve met with a few banks and several small Canadian-traded oil companies, which show us some promise down here. We’ve also met with officials of the Treasury and the lumbering state-owned oil giant Ecopetrol, which shows how much progress is yet to be made. More about all of that tomorrow.
“I think the reader has a point in saying, ‘Give me the ticker, and if it's a winner, I pay you for a subscription.’ But we are living in a world of ‘not so honest’; therefore, it's tough to please everybody. What if some reader makes money and forgets to buy?
“I suggest that you find good tickers like you have done for me in Outstanding Investments, Energy & Scarcity Investor and so far in Penny Stock Fortunes. Your editors make me confident in buying selected stocks. Thanks, 5.
“You are not quite right about the price of a Swiss franc a long time ago. It USED to be 5 francs for $1 and 4 D-marks for $1, not 4 francs. Those were great days to be a North American student in Europe.
“P.S. In terms of CHF, gold has not risen that much. In 1969, it was 175 CHF per ounce. Now it is about 1,295 CHF per ounce — that is, up only 7.4 times over the last 41 years.
The 5: Ahh… the Great Dollar Standard Era: You gotta love it… while you still can.
After all, what are we to make of the observation that the world "reserve" currency — the one used for trade and wealth preservation by most peoples and nations around the globe — is one whose purchasing power deteriorates by “only” 86% in four decades?
The 5 Min. Forecast
P.S.: We'll have more thoughts for you from Colombia tomorrow. In the meantime, allow me to point out one final, but urgent, news item: Our resident stock market vigilante, Dan Amoss, just zeroed in on a fad stock that he believes will crash by March 15.
“If you hold this stock in your portfolio, dump it before they release earnings,” Dan recommends.
But it’s not all doom and gloom. Dan’s also found a unique way for you to make up to three times your money by betting against the company. He lays out all the reasons why he believes the stock will crash right here.
Even if you’re not interested in trying to make money as this company crumbles, you’ll at least want to make sure you don’t own shares. Click here to learn the name and ticker of the play.