Brazil is loved, but how much is priced into that perception?

Key News

Quotable – On Greek debt

“It’s not a question of enough, pal. It’s a zero sum game, somebody wins, somebody loses. Money itself isn’t lost or made, it’s simply transferred from one perception to another.”

                           Gordon Gekko, Wall Street

FX Trading – Brazil is loved, but how much is priced into that perception?

Gotta love that quote: “…simply transferred from one perception to another.” It really does sum it up well. We know Blue Horse Shoe loved Anacot Steel…we know gold bugs love gold…we know commodities bulls love all things commodities…and we know Morgan Stanly loves Brazil…

“The [Brazilian] economy is firing on all cylinders. Recent activity data have been strong, and even better than expected – including numbers such as February industrial production (up 18.4%Y) and retail sales (up 12.3%Y). Partial proxy indicators for March look upbeat. Ranging from energy consumption and car production, all the way to paperboard sales and heavy vehicles traffic in main roads, all figures were once again sequentially positive in March (month-on-month, seasonally adjusted), with most year-on-year comparisons firmly in double-digit territory. For their part, demand drivers are supportive – including credit conditions, labor markets and sentiment surveys among consumers as well as businesspeople.”

… but there are some things we don’t know

How much of this good news is already in the price of Brazil and all things commodities to which Brazil is a poster child…the Brazilian-USD pair has not yet made it back to its old credit-crunch high…

Brazilian Real-USD Weekly:

Brazilian real/US$ and the Brazilian stock market are joined at the hip; it is about money flow…and coincidently the Brazilian stock market got whacked yesterday (along with the US), breaking below its daily trend line going all the way back to March 2009:

In a world where a couple of interesting things are happening: 1) Europe is trying to stave off risk that could lead to major contagion, and 2) China seems serious about reining in some of its tower real estate through credit controls, it might mean the demand expectations for all things commodities is in for some dampening. That has been our thinking, and it’s why we think the commodity currencies are at least fairly valued, if not overvalued against the buck.

But we could look at this from another direction: Given the huge run in stocks, the lagging CRB index tells us commodities are relatively undervalued. After all, if stocks are right about a boom in global demand, more commodities demand would follow…

CRB Index versus World Stock Index Daily: There is a huge divergence here?

…and if more commodities demand follows then Morgan’s love for Brazil will likely be rewarded.

What’s your perception?

I think Gordon Gekko nailed it. In a world where there is a continuous feedback loop between prices and fundamentals, and fundamentals are fleeting, it has to be about money transferring from one perception to another.