Macro Tsimmis

intelligently hedged investment

SELL MSCI Brazil Index (EWZ)

Posted by intelledgement on Wed, 10 Sep 08

We actually like Brazil even more today than we did back in January 2007 when we recommended buying this ETF…for the long run. And we fully expect to be back in here. But for now, the gathering storm of the worldwide economic downturn will rain on Brazil’s parade just as it will on that of the USA, and we need to take or remaining profits here and reallocate the funds to a drier locale (most likely a reverse sector or index ETF).

Up to now, we have expected the markets to remain stable-to-bullish through the US presidential elections, but last weekend’s move by the federal government to take over Fannie Mae and Freddie Mac—in effect, undertaking potentially $1 trillion in obligations by guaranteeing those failed companies’ obligations—is a wake up call. Hey, we got trouble. Right here in River City. With a capital “T” and that rhymes with “D” and that stands for “debt.”

We have only the vaguest idea of the impact of the mountains of debt and dollars the government will be issuing over the coming weeks and months to counter the credit crisis that has the likes of Wachovia, Washington Mutual, and Lehman Brothers in the financial ICU (and the line for the emergency room is out the door and around the block)…but the effects on the dollar won’t be pleasant…to say nothing of inflation. And we really don’t know at what point folks begin to question the wisdom of continuing to fund the debt of the USA and the interest rate for treasuries begins to ramp up—in fact, we don’t really want to know—but unfortunately, it seems more and more likely that we are going to find out.

The market was euphoric about this Fannie/Freddie bailout on Monday, but we believe that Tuesday’s downturn was more apropos. No way did the Bush administration want to make this move prior to the election (or at all; they were no doubt hoping the spirit gum and baling wire would hold through to January so it can be the next guy’s problem). The fact that the pulled the trigger on an emergency-over-the-weekend basis tells us that things are a lot worse—and have degraded a lot faster—than they had thought.

When we do return here, we expect it to be at a lower price. Probably—unfortunately—much lower.

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