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First One Out Laughs (FOOL)

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February 12, 2009 – Comments (0) | RELATED TICKERS: GM , PBR , EWZ

This post was inspired by gne1963 blog post on Brazilian car sales with its link to an article pumping investing in Brazil titled "Betting on Brazil", and an investing thesis built around growth in Brazilian car sales and how that indicates Brazil might be a good place to invest. I say be careful because....

Brazil maintains a 35% import tarriff on automobiles. A $45,000 US made Expidition costs $60,000 in Brazil.

Rising incomes from commodity exports (which have slowed considerably) combined with the recent completion and expansion of auto factorys in Brazil which lower the price of the cars by ducking the tarriff, have filled what is likely a very small spike in real purchasing power.

The reason I say "small real purchasing power" comes from 4 paragraphs in this article ( http://articles.latimes.com/2008/apr/12/business/fi-garage12 ) which suggest that the "rising incomes" are not as spread out or high as some might suggest. Also contributing to sales is increased availability of credit and a person can probably guess how that will turn out in light of recent evidence.

Bank employee Rafael Hanzava bought not one but two new cars in recent months: a Peugeot and a Fiat. He loved the styling and gas mileage of both of them, but what really sealed the deals, he said, were the five-year loan on the Peugeot and a six-year loan on the Fiat that dealers offered.

As a car mechanic, I know very clearly what happens to a persons finances when they get a five year car loan to lower their car payments and squeek them into their budget. In year three or four when the car breaks they have saved no money to pay the repair, so they put the repair on their credit card at 14- 31% interest, and use their credit to replace the car. They lock in the "loans for life" that we have here in the USA at great benefit to the lender and devastating result to the borrower.

As recently as five years ago, a two-year loan was all he could have hoped for, which would have made his monthly payments too high.

Easy credit, a booming economy and growing consumer confidence have unleashed a torrent of pent-up demand for new cars in Latin America’s most populous country, pushing the number of autos sold up a staggering 31% so far this year, on top of 28% growth last year.

Here are the Gov't officials who will be ignored today, but mentioned tomorrow as having had forsight:

Not all of Brazil is thrilled about the increase in car ownership. Some government officials are concerned about consumers’ rising levels of indebtedness. Outstanding car loans rose 30% last year to nearly $45 billion

I would be more inclined to go long the banks, with stops in place.

Volkswagen spokeswoman Junia Noguiera said the company’s lending arm now offers car loans of up to seven years, up from a maximum of 24 payments in 2002.

“People buy cars according to how well the payments fit their monthly budgets,” Noguiera said.

Leticia Costa, president of Booz Allen Hamilton management consultants in Sao Paulo, said the Brazilian car boom could still have a long way to run because outstanding credit – figured by taking total loans as a percentage of Brazil’s annual economic output – is still relatively low at 34%. By contrast, outstanding credit in the United States equals 160% of gross national product.

With all due respect to Leticia, who seems more snake oil salesman to me than "management consultant" I'm guessing while Brazils outstanding credit is relatively low compared to the USA it is not relatively low compared to 2004 Brazil. And as the article says Brazil is in good shape because "Government spending is more disciplined leaving less chance of a financial meltdown"  Of course Gov't borrowing to fix this traffic problem;  "Officials here in Sao Paulo, plagued with monumental traffic tie-ups and averaging 800 more car registrations a day, say the government isn’t building highways fast enough. The city lacks a ring road, and rising numbers of trucks – another sign of economic good times – are plowing through town as well." and build the 1mil houses I heard last night that Brazilian Gov't feels are needed should solve their financial success. I suspect a swarm of "consultant" Letica's will suggest borrowing to fund this buildout, while penning news articles on the benefits of tax cuts, and the general incompetence of Gov't and thus the benefit to the Public of small Gov't.

And for the record; it is not the Gov't spending that will be the problem. It is the borrowing instead of taxing to fund the spending that is. The problem is the banks and the easy credit. But here in the USA, we should know that.

If you do not have the time to monitor Brazilian news and lending laws, use stops or stay the "F" away. 

So be warned, if you are going long on a Country that is expanding its borrowing watch it closely because the First One Out Laughs (FOOL).

 

 

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