BVSP (Brazilian Bovespa Stock Index) INDX

[setravis]

Two Ways to Add Brazil to
Your Investment Portfolio

Today, the Brazilian real is strong (and the dollar is weak). The real is now at a 10–month high against the U.S. dollar (having risen 40% from its lows in early 2009). This prompted the Brazilian finance minister to threaten weakening the real. You've probably heard of his comment about a "currency war."

What he fears is that the strong real will hurt Brazil's export goods by making Brazilian goods more expensive, hence weakening Brazilian economy. It is a tired line of reasoning. This idea that a country gets rich by destroying the value of its currency is a weed that won't go away no matter how many times you pull it from the soil.

What's curious about this is that you'd think a Brazilian would appreciate the dangers of weakening a currency more than most. Brazil has had a habit of blowing up its currency over the last 60 years.

From 1942 to the present, Brazil went through eight different currencies:
•   Mil Reis, 1833-1942
•   Cruzeiro, 1942-1967
•   Cruzeiro Novo, 1967-1986
•   Cruzado, 1986-1989
•   Cruzado Novo, 1989-1990
•   Cruzeiro, 1990-1993
•   Cruzeiro Real, 1993-1994
•   Real, from 1994.

The present-day real is but a teenager, a mere youth sprung from a bad family. Yet it is among the world's strongest currencies today, bolstered by the commodity wealth and strong growth rate of Brazil's economy.

Say what you will about the U.S. dollar, which has been a poor currency as far as retaining its purchasing power over time, but it's never gotten so bad that we had start over — at least not yet. Brazil's experience makes the dollar look like a gold standard. It was not that long ago that Brazil's inflation rate hit 2,700%. It happened in one 12-month period from 1989-1990.

Even as late as 1999, Brazil was a financial basket case. In 1998 and 1999, its finances were such a mess that Brazil got the biggest IMF rescue package in history up to that point, $41.5 billion.

During the 20th century as a whole, Brazil had a cumulative inflation rate of more than a quadrillion percent. If you were a net saver in Brazil and kept that money in Brazil's currency, you lost big. You might as well have set the money on fire.


Today, Brazil is in a different position. The currency is so strong, its politicians fret. American travelers find no bargains in the shops of Sao Paulo or Rio. Brazil, too, has huge currency reserves and is now a net creditor, not a debtor. Brazil is even accumulating gold — the real thing. We met with an economist on our trip here who made a presentation that showed Brazil's central bank has 5% of its reserves in gold — and it's been buying more.

Today, U.S. investors go out of their way to buy products that give them exposure to Brazilian reais, instead of U.S. dollars. It's incredible when you think how much things have changed in just the last 10 years.

Of course, Brazil could screw it up again.

There are some worrisome signs. The new favorite for president is Dilma Rousseff. She is a former Marxist guerrilla. Captured in 1970, she was beaten and tortured. Hers is a quite a tale, and you can find out more about her on the web. The Wall Street Journal also recently featured a front-page story about her.

Suffice to say, she has since mellowed out, supposedly. Most see her as simply continuing the policies pursued under current President Lula. But we'll see...

As with any emerging market, there are big problems, but also big opportunities. Still, Brazil's economic challenges seem less complicated and smaller than those in the U.S., where debt and deficits are much larger. And currency screwups are relative. Forced to make a choice, I'd rather bet on the Brazilian real than the U.S. dollar.


If you want to add exposure to economic growth in Brazil, the easiest solution is to buy Brazilian stocks – thereby avoiding (some of the) risks of inflation in the real. If you're not familiar with specific Brazilian companies, the easiest option is to buy shares of one of the popular Brazilian exchange-traded funds on the market.

Leading the pack is the iShares MSCI Brazil ETF (NYSE: EWZ), a fund with more than $11 billion under management, weighing in as the largest single country ETF outside of the United States. But for penny stock investors, another attractive option is the Market Vectors Brazil Small Cap ETF (NYSE: BRF), a much smaller fund that focuses exclusively on small-cap stocks in Brazil.]

[setravis]

Brazil...
The Bovespa index is headed for a test of resistance at 72000 after breaking 68000. Rising Twiggs Money Flow (13-week) signals buying pressure. In the long-term, breakout above 74000 would offer a target of 80000*. Reversal below 68000, however, would test primary support at 64000.

Target calculation: 70000 + ( 70000 - 60000 ) = 80000


Markets cautious after quarter-end...
Secondary Asian markets are climbing, but Japan and mainland China remain weak. Europe looks anemic and North America is likely to follow. Resource-rich Australia and Brazil have broken out, but tentatively, and are unlikely to follow-through unless we see a recovery in Japan and mainland China. Quarter-end has passed, together with any motivation for fund managers to support current price levels. Expect a mid-October retracement to test support levels.

[setravis]

How to Profit from São Paulo's Housing Boom...

Someone once said that the city of São Paulo was as if LA threw up on New York. That's an imaginative way to describe this sprawling metropolis. It's a bustling, congested city of 11 million people, with another 9 million in the suburbs. Greater São Paulo ranks as the third largest urban area in the world, according to the United Nations, after only Tokyo and Mexico City.

For many, it's an ugly city, but I loved it right away. While gloom and doom hover over the economies of the U.S. and Europe, it is impossible to maintain a sense of pessimism in São Paulo — or Brazil, for that matter. It's a showcase for the kind of changes sweeping over the emerging markets.

São Paulo had a humble beginning. Jesuits founded it on the banks of the little Tietê River in the 16th century. It was for hundreds of years an insignificant settlement. Even as late as the 1870s, it had only 26,000 inhabitants, cobbled around narrow streets.

But it would go on to put up perhaps the greatest population growth curve of any major city in human experience (as the Fernand Braudel Institute maintains). A great coffee boom in the 19th century was the kindle that sparked São Paulo's growth. By the 1890s, the population tripled. And today, there are 20 million people in greater São Paulo.

The state of São Paulo has 45 million people and makes up nearly a third of Brazil's economic output. Half of the country's tax base is here. If it were its own economy, the state of São Paulo would be the second largest in South America — behind only Brazil and ahead of Argentina and Colombia. It is also home to Brazil's stock market, the fourth largest in the world by market cap.

São Paulo did not grow up slowly around a center, as did the cities of Europe. Rather, it grew hastily and in an improvised manner. You can see the consequences of that process today. Traffic is horrendous. It can take more than an hour to move only a handful of blocks. The subway system is not up to the task of serving the entire city. And record car sales overwhelm the construction of new roads.

There is also an acute housing shortage, which is where an interesting investment opportunity lies. There are a lot of ways to show the data on housing. One common way to measure housing shortages is to look at how many families have three people per bedroom. This measure shows about 13% of families live in substandard housing. Expressed as a number of units, Brazil needs nearly 6 million new homes.

That's really not surprising when you think of the swelling ranks of the middle class. Millions of people have become consumers in the last decade. Housing has not yet caught up with that demand. By some estimates, Brazil needs to build about 1.6 million homes every year just to keep up with new families entering the market.

In São Paulo, you can also see the shortage in the price of homes. New construction often takes three years. People now taking delivery for housing units bought three years ago find that the value of their dwelling doubled.

All that frothiness has some people worried about a housing bubble. Brazil's mortgage market, too, is in hyper-growth mode. Take a look at the total loans to homebuilders and buyers.



It looks impressive, but the starting base was very low. Brazil's home lending market is still only a fraction of that found in other Latin American countries, such as Mexico or Chile. Brazilians also have much more equity invested in their homes. Typically, loan-to-value is 70–75%.

Eventually, supply will catch up with demand, and maybe even exceed it. Then you'll have a correction. But that day seems years away.

There is a direct way to play the São Paulo housing boom. It's a mid-cap Brazilian homebuilder with penny stock growth potential.

[setravis]

Brazil...
The Bovespa index reversed below support at 70000, warning of a correction. Small bearish divergence indicates a lack of selling pressure. Expect a test of 68000. In the longer term, recovery above 72000 would test the 2008 high of 73500/74000.

* Target calculation: 70000 + ( 70000 - 60000 ) = 80000

[setravis]

Brazil...
The Bovespa index broke resistance at 72000. Twiggs Momentum (21-day) holding above zero indicates a strong up-trend. Expect retracement to test the new support level, followed by a rally to the 2008 high at 73500/74000.

* Target calculation: 70000 + ( 70000 - 60000 ) = 80000

[hectorgr]

Suggest to keep in mind the following tickers related to Brazil depending on the
acceptable risk you may want to take:
EWZ - ILF - LBJ (triple long).

KRgds

Hector

[setravis]

Suggest to keep in mind the following tickers related to Brazil depending on the
acceptable risk you may want to take:
EWZ - ILF - LBJ (triple long).

KRgds

Hector

hectorgr,
Thanks, it's good to see someone jump in and reply.
3SOF. now sometimes seems like a ghost town...

good trading to you.
regards
setravis

[setravis]

Bloomberg

Brazil Sets Reserve Requirement to Stem Real Rally
January 06, 2011, 5:39 PM EST

Brazil's central bank set reserve requirements on short dollar positions held by local banks in its third attempt since October to stem a rally in the currency. The real fell for a third consecutive day.

The new rules have the potential to reduce short positions in the dollar to $10 billion from $16.8 billion in December as banks seek to avoid paying reserve requirements on currency operations, Aldo Mendes, the central bank's director of monetary policy told reporters in Brasilia.

Starting April 4, Brazilian banks will need to deposit in cash at the central bank 60 percent of their short positions in U.S. dollars above $3 billion or their capital base, whichever is smaller. The reserves will not earn interest, Mendes said.

"The international environment is challenging and generates the need to focus on financial stability," central bank President Alexandre Tombini said. "The central bank takes measures when it decides to take it. This was the adequate moment."

Policy makers in Latin America are trying to stem currency gains as fast economic growth and low interest rates in rich nations attract capital inflows to the region. Finance Minister Guido Mantega said this week that Brazil's government is ready to take new measures to prevent the dollar from "melting" and stem the real's 37 percent rally against the dollar since 2009.

Excessive Positions

Tombini said the short dollar positions were excessive relative to the size of the currency market, prompting the central bank to set the reserve requirements. He cautioned Brazilian companies, saying that in a floating regime the exchange rate can swing both ways and that high levels of international liquidity were unlikely to persist.

"This measure is probably the first of a series of moves that the new government will announce -- they will do what it takes to hold the real," Marcelo Salomon, chief economist for Brazil at Barclays Plc in New York, said in a phone interview.

The measure could weaken the real in the short-term, though is unlikely to have a lasting effect, said Andre Perfeito, chief economist at Gradual Investimentos. The real's appreciation is based on "fundamentals," he said.

Since October, Brazil's central bank has twice raised, to 6 percent, a tax foreigners must pay to buy fixed income and derivative assets. President Dilma Rousseff, in her inaugural address Jan. 1, pledged to protect the country "from the indiscriminate flow of speculative capital."

Brazil's real fell as much as 1.17 percent after the announcement before paring losses. The currency weakened 0.8 percent to 1.6869 per dollar. Yields on the interest rate futures contract due in January 2012 rose 1 basis point to 12.1 percent.

Latin America

Other emerging markets including Chile and Peru have stepped up their battle against the weak dollar in recent days.

Chile this week said it will buy $12 billion in the foreign-exchange market to weaken the peso, the region's best- performing currency over the past six month. Peru's central bank on Jan. 1 extended reserve requirements for banks to their overseas units to stem inflows increasing volatility in the sol.

'Infinite' Tools

Mantega said Jan. 4 that the government has an "infinite" number of tools at its disposal to affect the country's exchange rate and support exporters hurt by the currency gains.

Brazil's trade surplus narrowed 20 percent last year from 2009 as a stronger currency and the fastest economic growth in more than two decades fueled imports.

Perfeito said today's move by the central bank shows that Rousseff's top concern is preventing the real from strengthening further. The move raises the risk bank President Tombini won't raise the benchmark Selic rate this month to control inflation running at a 23-month high, he said.

"Perhaps they won't increase the Selic at the next meeting, because they are trying so hard to control the exchange rate," Perfeito said. "That's my worry right now."

Traders are betting policy makers will raise the benchmark rate by 50 basis points, to 11.25 percent, at their Jan. 18-19 policy meeting, according to Bloomberg estimates based on interest rate futures contracts. Brazil's real interest rates accounting for inflation, the highest in the Group of 20 nations, are a magnet for speculative capital, Mantega has said.

Inflation Jump

Brazilian consumer prices, as measured by the IPCA-15 index, jumped 5.79 percent in the 12 months through mid- December. That's the highest inflation rate in almost two years.

Mendes said today's move had no connection with monetary policy.

In 2009, Brazilian banks held $2.9 billion in long positions in dollars, swinging to $16.8 billion in short positions at the end of 2010, Mendes said.

"It's bad for the economy when the system swings to one extreme," Mendes said.

The measures are "prudential" and could spur dollar purchases that weaken the real and reduce the central bank's daily dollar purchases, he added.

Nelson Barbosa, the Finance Ministry's executive secretary, said today's measures had been under consideration since 2008 and will reduce volatility in the foreign exchange market.

[setravis]

Brazil Current Account Deficit to Widen to $64 Billion in 2011...

Brazil's current account deficit will widen to $64 billion in 2011, up from $49 billion in 2010, according to central bank estimates published today.

Previously the bank had seen the 2011 deficit at $60 billion.

[setravis]

Brazil Leaves Options Open for 2011 Rate Increase...

Brazil's central bank kept its options open for when it lifts interest rates to cool inflation running at a five-year high, after leaving its benchmark rate unchanged yesterday at President Henrique Meirelles' final board meeting. Yields fell across the board.

Policy makers including Alexandre Tombini, who is slated to succeed Meirelles next month, voted unanimously to keep the Selic rate unchanged at 10.75 percent. The decision matched the forecast of 48 of 51 analysts surveyed by Bloomberg. Three economists forecast at least a quarter-point increase.

The eight-member board, in a statement, said they faced a "less favorable scenario" than in their last meeting, and they needed "more time" to gauge the economic impact of new reserve requirements on banks to curb the growth of credit.

"There is no smoking gun here that they are going to hike rates in January," Marcelo Salomon, chief Brazil economist for Barclays Capital, said in a telephone interview from New York. "The markets are going to re-asses the probability that they are going to hike already in January."

Traders pared bets on a half-point rate increase next month. The yield on interest-rate futures contracts maturing in January 2011, the most traded on the Sao Paulo BM&F exchange, fell 8 basis points to 10.64 percent at 6:52 a.m. New York time. Yields on contracts due February fell 11 basis points to 10.72 percent.

The bank's Dec. 3 announcement of an increase in reserve and capital requirements for bank deposits has introduced uncertainty about the time and magnitude of the rate increases, said Gray Newman, chief Latin America economist at Morgan Stanley.

'Delay Again'

"The language today didn't clarify that at all," Newman said in a telephone interview from New York. "It leaves the door open for them, they could delay again."

The world's eighth-largest economy expanded 0.5 percent in the third quarter from the previous three months, the national statistics agency said today in Rio de Janeiro. The figure, while higher than the 0.4 percent median forecast in a Bloomberg survey, was the slowest quarterly expansion since Brazil emerged from the global financial crisis in the second quarter of 2009.

Gross domestic product grew 6.7 percent from the same quarter a year ago, spurred by a 21 percent increase in investment and 5.9 percent growth in consumer spending.

The economy will grow 7.54 percent this year, its fastest pace in more than two decades, according to the most recent central bank survey.

Retail sales grew 11.8 percent in the year through September, the fastest pace since March. Unemployment fell to a record low 6.1 percent in October.

Domestic demand, buoyed by consumer lending growing at a 20 percent annual pace, is fueling an acceleration of inflation.

Inflation Surge

Consumer prices, as measured by the benchmark IPCA index, rose 5.63 percent in November from a year earlier and 0.83 percent from October, the biggest monthly increase since April 2005.

Inflation expectations for 2011 have accelerated to 5.2 percent, from 4.8 percent in August and 4.5 percent in March, according to the central bank survey.

"The inflation picture is worsening and argues for policy response," said Marcelo Carvalho, head of Latin American research at Banco BNP Paribas Brasil in Sao Paulo. Carvalho expects Tombini to raise the Selic by at least 50 basis points next month.

Tombini

Tombini, who has been on the bank's board since 2005, won Senate committee approval to be the bank's next president on Dec. 7. At his confirmation hearing he echoed remarks made by Meirelles that higher reserve levels would have an impact on the economy, even though they aren't a substitute for traditional monetary policy tools.

President-elect Dilma Rousseff has pledged to contain spending next year in a bid to reduce Brazil's real interest rate, the highest in the Group of 20 nations.

Higher borrowing costs are also putting pressure on the real, as investors buy higher-yielding currencies with funds borrowed at lower rates. The real, which is the best performer among 16 major currencies tracked by Bloomberg over the past month, appreciated 0.1 percent to 1.6894 per U.S. dollar.

"Although the statement raises doubts on when they will resume rate increases, policy makers need lower inflation expectations and a strong fiscal adjustment to avoid raising rates," said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc. "There won't be enough time for that before the January meeting."

[setravis]

Brazil Credit Measures May 'Precede' Policy Action...

Brazil's decision this month to raise banks' reserve requirements to slow credit growth may "precede" conventional monetary policy action, the central bank said.

The central bank, in the minutes of the Dec. 7-8 meeting, said the "macro prudential" measures are a "fast and powerful" tool to contain localized demand pressures and will have an impact on prices that jumped by the most in five years last month. Policy makers said they must remain "especially vigilant" to prevent short-term inflationary pressures, pushed by higher food prices, from extending over time.

Policy makers voted unanimously to keep the Selic rate at 10.75 percent for a third straight meeting last week, matching the forecast of 48 of 51 analysts surveyed by Bloomberg. Three economists forecast at least a quarter-point increase.

The minutes show that the central bank is likely to raise borrowing costs 50 basis points at its Jan. 18-19 meeting to 11.25 percent, said Marcelo Carvalho, head of Latin American research at Banco BNP Paribas Brasil in Sao Paulo. The meeting will be chaired by Alexandre Tombini, who the Senate confirmed yesterday as President-elect Dilma Rousseff's choice to succeed Henrique Meirelles as bank president.

"They are paving the way for upcoming hikes," said Carvalho in a phone interview. "The timing is left open, but all the conditions are set for Tombini to hike in January."

Yields Rise

Yields on interest-rate future contracts due before July 2011 rose, as traders increased bets on rate increases next year. The yield on the contract due in April 2011, the most traded in Sao Paulo today, rose 1 basis points to 10.93 percent at 7 a.m. New York time. The real strengthened 0.3 percent to 1.7037 per U.S. dollar.

In holding rates steady this month for the third-straight meeting, policy makers including Tombini said they needed "more time" to gauge the economic impact from recent measures to slow credit growth. Policy makers on Dec. 3 boosted reserve and capital requirements for lenders to remove about 61 billion reais ($36 billion) from the economy.

Not a 'Perfect Substitute'

The bank, in its minutes today, said the measures aren't a "perfect substitute" for raising interest rates, since they are part of an effort to reverse stimulus measures adopted during the global financial crisis.

Recent economic data signaling the expansion of Latin America's biggest economy is easing may provide more space to Tombini to decide the timing of an expected rate increase.

Retail sales rose 0.4 percent in October from September, less than the 1.1 percent median forecast by 25 economists surveyed by Bloomberg, the national statistics agency said Dec. 14. The IGP-M price index, the nation's broadest gauge of inflation, rose 0.83 percent in the first preview of December, less than the 0.95 percent median forecast.

The bank said that higher food prices had affected inflation "strongly" and "negatively," since its October meeting. Gas prices, which the bank previously saw remaining unchanged this year, are now expected to rise 1.6 percent.

Policy makers said they no longer see the weak global economy helping to contain price pressures.

"The likelihood of seeing some disinflationary influence from abroad has fallen, although substantial uncertainty persists over the behavior of asset and commodity prices in the context of substantial volatility in international financial markets," the minutes said.

"The minutes take a more realistic view of inflation, recognizing the recent worsening," Carvalho said.

Consumer Prices

Brazil's consumer prices, as measured by the benchmark IPCA index, rose 0.86 percent in November, the biggest jump in five years. The annual inflation rate was 5.63 percent in November, the highest level since February 2009. The central bank targets annual inflation of 4.5 percent, plus or minus 2 percentage points.

Inflation expectations for 2011 have been rising since August. Consumer prices will climb 5.21 percent next year, according to the median forecast in a Dec. 10 central bank survey, up from an August forecast of 4.80 percent.

Third quarter gross domestic product grew 0.5 percent from the previous quarter and 6.7 percent from a year earlier.

[setravis]

Brazil's Prospects for Growth
Paulo Leme, Goldman Sachs' emerging markets chief, says his native Brazil should seize a historic opportunity for growth as a new President takes over

How do you see Brazil right now?
The economy is growing at almost twice the rate that it has in the last 10 years. Brazil is experiencing a fairly healthy increase in employment and wages, and an improvement in income distribution, so there is a feel-good factor. I would say this is a once-in-a-century kind of opportunity to accelerate growth to 6 or 6.5 percent and unleash all of this upward mobility.

How can Brazil make that happen?
The key is structural reform—for example, a reduction in the tax burden, which would make exports more competitive. Also things that would boost productivity, like better education and a better health system.

Is Brazil growing too fast?
Domestic demand is outstripping supply. The appreciation of the real also makes it cheaper to import from the rest of the world. Brazil would benefit enormously from some containment in fiscal spending and public credit growth and moderation in public-sector wage hikes.

Is that the direction you expect from President-elect Dilma Rousseff?
She has the awareness and possibly the inclination to do some rebalancing of macroeconomic policies. We are on the eve of another significant monetary easing by central banks in advanced economies. However, at some point they will tighten significantly. The question is, will that lead to a sudden stop of capital flows or even a reversal? Brazil's macro policy should be prepared for that eventuality.

[setravis]

Brazil's Credit Boom Could End in Tears
Consumer credit has shot up fivefold since the end of 2002. Now Brazil's leaders are moving to head off a subprime-style crisis

The Nov. 9 rescue of Brazil's 21st-largest bank, Banco PanAmericano, has exposed cracks in what many had regarded as one of the most solid financial systems among emerging-market countries. Brazil's economy grew at a 8.4 percent clip in the first nine months of 2010—its fastest pace in more than 15 years—powered in part by a sharp increase in government-subsidized loans and a rapid expansion in consumer credit. That can be a lethal cocktail. The data in Brazil are troubling: Late payments on credit cards and other consumer loans jumped 23 percent in November from a year earlier, prompting government leaders to begin scaling back their easy-credit policies. "It's time to be a little bit careful about the B in BRIC," says Jim O'Neill, chairman of Goldman Sachs Asset Management (GS) and the man who coined the BRIC acronym for Brazil, Russia, India, and China.

Former President Luiz Inácio Lula da Silva, a founder of Brazil's Workers' Party, impressed Wall Street with his commitment to free-market policies. Yet even he was unable to resist the temptation of indulging in an age-old Brazilian tradition: the election-year splurge. The national development bank, known as BNDES, made $101.1 billion in loans in the 12 months to October, a 33 percent increase from the same period a year earlier. Lula's protégée and successor, Dilma Rousseff, pledged to rein in spending as she assumed power on Jan. 1.

Bankers in New York, London, and as far away as Shanghai have a lot riding on how well Rousseff steers Latin America's biggest economy. With interest rates at all-time lows in much of the developed world, the 12 percent return on benchmark 10-year Brazilian government bonds has attracted money from all over. Foreign investors poured $15.9 billion into Brazil's stock market in the past two years. "The quest for yield and higher investment returns has flooded Brazil and other emerging markets with capital from around the world," says Russell Certo, a managing director at New York-based investment bank Gleacher & Co.

The capital inflows have buoyed Brazil's currency, the real, causing it to rise 34 percent against the dollar since late 2008. Finance Minister Guido Mantega, a holdover from the previous administration, has said he would consider a number of measures, including the imposition of new capital controls to fight the currency's appreciation, which puts Brazilian exporters at a disadvantage.

At the same time, Brazil's central bank is moving to curb the growth in consumer loans. The country has witnessed a fivefold expansion in consumer credit over the past eight years, with the total value of outstanding loans reaching $440 billion in October, according to central bank figures. This explosion was triggered in part by a 2001 regulatory change that allowed lenders to package auto, payroll, and other consumer loans into securities called FIDCs. The market for such notes has grown from nearly $290 million in 2003 to more than $35 billion last year.

Big Brazilian banks have stopped buying the credit portfolios since a November government probe into PanAmericano revealed losses stemming from improper accounting of sales of its loans. "PanAmericano was the wake-up call," says Denise Debiasi, the São Paulo -based managing director for Latin America at FTI Consulting (FCN), a Baltimore firm that advises on compliance, risk, and finance. "There's risks people may be overlooking—like credit quality—as the market booms." PanAmericano won't comment on the ongoing investigations, according to a spokesman at the bank's public relations firm.

To head off a subprime-style crisis, Brazilian authorities in December upped reserve requirements on time deposits held by banks to 20 percent from 15 percent. Banks must put aside more capital to back consumer loans whose terms exceed 24 months.

The government is also looking to regulate Brazil's credit-card industry. There are now 153.4 million credit cards in circulation in the country, triple the number from 2003. The average debt load of Brazilian consumers amounts to 18 percent of total disposable income, compared with 13 percent in the U.S., says Morgan Stanley (MS). In a Nov. 30 interview, Henrique Meirelles, who at the time was Brazil's central bank chief, indicated that a special task force would be convened to study the industry. "Some supervision could be proper," he said. "The case of PanAmericano showed how important this is."

The bottom line: The bailout of a Brazilian lender has exposed the need for greater supervision of the local consumer credit industry, which is growing rapidly.

[setravis]

Bovespa Retreats, Paring Weekly Gain, on Inflation, Bank Rout
January 07, 2011, 4:12 PM EST

Brazil's Bovespa stock index fell for a second day, trimming its weekly gain, as a report showed inflation last year quickened faster than forecast and banks tumbled for a second day.

B2W Cia. Global do Varejo, the nation's largest Internet retailer, fell as traders increased bets that policy makers will have to raise borrowing costs to slow inflation. Itausa - Investimentos Itau SA led a drop for financial shares on concern government measures to contain currency gains and restrict credit will hurt earnings.

"Rates will have to go up to maintain sustainable growth," said Roni Lacerda, who helps manage 2.8 billion reais ($1.6 billion) at Rio de Janeiro-based Mercatto Gestao de Recursos. "It'll be a volatile year because of valuations and problems in Europe and the U.S. recovery."

The Bovespa index slipped 0.7 percent to 70,057.20 at 3:15 p.m. in New York, trimming the weekly gain to 1.1 percent. Almost two stocks fell on the index for each that rose. The BM&FBovespa Small Cap index slipped 0.7 percent to 1,421.58, for a decline of 1.3 percent for the week, led by homebuilders on concern borrowing costs will increase. The real strengthened 0.2 percent to 1.6840 per U.S. dollar.

Consumer prices, as measured by the benchmark IPCA index, rose 0.63 percent in December, more than the 0.6 percent median forecast among 27 analysts surveyed by Bloomberg. Prices rose 5.91 percent last year, the fastest annual pace since 2004, the national statistics agency said.

B2W Varejo sank 1.2 percent to 32.00 reais. Cia. Brasileira de Distribuicao Grupo Pao de Acucar, Brazil's biggest publicly traded retailer, sank 2.8 percent to 66.66 reais.

Rate Futures

Traders raised bets for higher borrowing costs, pushing the yield on interest-rate futures contracts due in January 2012 up 9 basis points, or 0.09 percentage point, to 12.19 percent.

U.S. payrolls increased 103,000 in December, trailing the median forecast for 150,000 among economists surveyed by Bloomberg, Labor Department figures showed.

The MSCI Brazil/Financials Index fell 1.6 percent to 930.56 and is down 4.5 percent since Jan. 5, for the steepest two-day decline since Nov. 23. Itausa, the parent of the country's biggest bank, led declines, falling 2.9 percent to 12.87 reais.

Brazil's central bank yesterday set reserve requirements on short dollar positions held by local banks to stem the rally in the real. Last month, policy makers had raised reserve and capital requirements to slow consumer lending growth and inflation. Investors are concerned more measures are on the way, according to Otavio Vieira, who helps manage 1.5 billion reais at Safdie Private Banking in Sao Paulo.

Usinas Gains

The index's drop was limited as Usinas Siderurgicas de Minas Gerais SA advanced after Banco BTG Pactual SA recommended buying the shares, saying Brazil's steelmakers are "under- owned."

Usiminas fell 22 percent last year as steelmakers plunged on concern record imports of the metal and rising coal and iron ore costs will squeeze earnings. BTG Pactual analysts raised Usiminas to "buy" from "neutral," citing a potential decline in imports, improving domestic demand and global steel prices.

Usiminas gained 1.7 percent to 20.60 reais today.

"We believe sentiment should change for the better," analyst Edmo Chagas wrote in a note to clients. "We believe the Brazilian steel sector is still under-owned."

The Bovespa rose 1 percent in 2010 as concern Europe's debt crisis and rising borrowing costs in China will slow demand for exports offset speculation the fastest growth in two decades will bolster earnings. The gauge trades for 12.9 times analysts' 2011 earnings estimates, according to weekly data compiled by Bloomberg, compared with a ratio of 15.9 for the Shanghai Composite Index, 8.7 for Russia's Micex and 19.5 for India's Sensex.

[setravis]

Rousseff Is No Lula as Brazil Stock Index Slumps
January 04, 2011, 11:42 AM EST

Brazil's President-elect Dilma Rousseff, faced with the highest inflation in 23 months and a growing budget deficit, is failing to convince investors that she can match her mentor Luiz Inacio Lula da Silva's record for spurring economic growth.

The Bovespa index of most-traded stocks fell 2.4 percent since Rousseff was elected Brazil's first female president Oct. 31 through yesterday, as traders stepped up bets the central bank will raise interest rates next year to keep consumer prices in check. The index rose 0.5 percent today, bringing the gain for the year to 1 percent, its worst-ever annual performance when measured against the MSCI Emerging Markets index, which has risen 16 percent.

To meet her goal of lowering real interest rates that are the second-highest in the world after Croatia, Rousseff will have to contain federal spending that has risen 25 percent this year and helped the economy grow an estimated 7.3 percent, the most in two decades. She'll inherit from Lula the most overvalued currency in the world according to Goldman Sachs Group Inc., and a record current account gap of $49 billion.

"The easy job is over; the hard work is ahead," said Eric Conrads, who helps manage $12 billion in emerging-market stocks, including Brazil, at ING Investment Management in New York. "She has to strike a good balance between the strong currency, the fiscal situation and the current account deficit without killing the economy."

Containing Spending

Yields on interest-rate futures due in January 2014 have risen 54 basis points to 12.21 percent since her election and yesterday, as traders increase bets incoming central bank President Alexandre Tombini will have to raise borrowing costs from 10.75 percent in the absence of spending restraint. Inflation has been running above the government's 4.5 percent target all year.

Yields on interest rate futures maturing in January 2014 dropped 6 basis points to 12.15 percent today. The real climbed 1.1 percent to 1.6600 per dollar.

Rousseff takes office Jan. 1 in Brasilia.

The 63-year-old Rousseff, who served as Lula's cabinet chief, coasted to a runoff victory over Jose Serra by promising to maintain the policies of her former boss. Lula is leaving office with a record 87 percent approval rating.

Rousseff reappointed Finance Minister Guido Mantega, who under Lula oversaw record lending by the state development bank and a doubling of the fiscal deficit since 2008 to 2.74 percent of gross domestic product. Mantega pledged in a Nov. 30 interview to block new spending in a bid to open room for lower rates.

Lula's Turnaround

Brazilian stocks may continue to trail other emerging markets in early 2011, even as they remain attractively valued, until Rousseff takes "concrete actions" to reduce government spending, Goldman Sachs said in a Dec. 19 report.

"After the economic expansion we've seen, the government needs to be very decisive in controlling spending," said Eduardo Favrin, who oversees about $2.5 billion as head of equities for HSBC Global Asset Management's Brazil unit in Sao Paulo.

Rousseff's transition team did not return several phone calls and e-mails by Bloomberg seeking comment.

In the run-up to Lula's first electoral victory in 2002, the currency plummeted 61 percent, stocks fell 26 percent and Brazil's borrowing costs doubled on investor concerns the former union leader would default on the country's debt.

'Challenge of Abundance'

Once in office, he paid $15.5 billion in loans to the International Monetary Fund ahead of schedule and accumulated a record $287 billion in international reserves. The Bovespa averaged annual returns of 29 percent during Lula's first seven years in office.

Lula also gave the central bank, which lacks formal independence, a free hand to fight inflation. That's something Rousseff will have to repeat with the 47-year-old Tombini because policy makers in Brazil aren't appointed to set terms like their counterparts at the Federal Reserve, Bank of England or European Central Bank.

With Latin America's biggest economy stabilized, Rousseff will need to tackle longstanding obstacles to faster economic growth like excessive red tape, poor infrastructure and high taxes, said Christopher Garman, director for Latin America at the Washington-based Eurasia Group.

She also needs to improve education and health care to meet the demands of 36 million Brazilians that have joined the middle class under Lula, he said.

Cautious on Brazil

"Rousseff's success will depend on her capacity to deliver beyond keeping inflation under control," said Garman. "Brazil is facing the challenge of abundance -- it's not an easy agenda."

Urgent concerns include a currency that has strengthened 34 percent against the U.S. dollar since the start of 2009, the third-biggest gain among major currencies after the Australian dollar and South Africa's rand. The strong currency is fueling imports that will narrow Brazil's trade surplus next year to a nine-year low of $11 billion, the central bank estimates.

John Ditieri, who helps oversee about $13.5 billion in emerging-market equities at Arlington, Virginia-based Emerging Markets Management, says he's cautious on Brazil until its clear how Rousseff will respond to the competing "political pressures" of exporters, investors and lawmakers.

All Tools

"We just hope they attack things in a balanced and responsible way," says Ditieri. "They probably are going to have to use all the tools they have."

Rousseff, a former Marxist guerrilla who never ran for office before being elected president, will be helped by bigger support in Congress than Lula had. Her Workers' Party and coalition partners boosted to 49 from 43 Senators its majority in the 81-seat chamber. Its control of the lower house taking office Feb. 1 is likely to increase too.

Infrastructure spending to host the 2014 World Cup and 2016 Olympics, and the $108 billion state-controlled Petroleo Brasileiro SA plans to invest through 2014 developing mainly offshore oil finds, should secure up to 5 percent economic growth even if Rousseff fails to address Brazil's economic weaknesses, said Ricardo Hausmann, an economics professor at Harvard University in Cambridge, Massachusetts.

"That might feel like a great rate of growth given Brazil's history, but it's so far below what is achievable," said Hausmann, a former planning minister of Venezuela. "The tragedy of Brazil is that it wouldn't take that much for the country to aspire to 7 percent growth."