The Fleet Street Letter’s Lynn Carpenter takes a peek at the U.S.’ oft-maligned neighbor to the south… and admires the highest paying investment grade T-Bills in the world.

Economists divide the world into the good, the probably bad and the downright ugly. They call them developed economies, developing economies and emerging economies; except for the dismal scientists who compile those nifty charts on the back pages of The Economist each week.

As far as The Economist’s economists are concerned, the world has 15 real leaders – these go in the tables and charts for "developed economies." In The Economist, everyone else goes on the list of also-rans.

Well, gee, what do you want from a magazine published in a country that still believes in the divine right of kings and pays an old woman in a flowered hat several mill a year to cut ribbons at horse shows? Vision? Elan? Daring? Modern thinking? Not likely. (Cheers, mates.)

It’s no wonder the Brits think Mexico is still emerging. That’s what they think of Ireland, too. But there’s no excuse for us to be so hidebound or blind… especially those of us who live right next door to one of the most vibrant economies in the world. Our neighbor to the south isn’t Sri Lanka or Zimbabwe. Mexico is a large, vital and increasingly strong economy.

The facts speak highly for Mexico. Let’s dig in…

There’s only one thing that might – just might – justify calling Mexico an emerging economy. It does have a lot of poor people.

Mexico’s average household income is well behind the incomes in Canada, Australia, France, Germany, the United Kingdom, Belgium, Austria, Switzerland, Japan et al. But that is changing rapidly because of far-reaching changes in its trade practices and its economic system.

In 1993, the GDP per head of household in Mexico came to $3,690. Over the next seven years, that number jumped nearly three-fold to $9,966. But this hides even greater strength. In the 1995-1996 recession, Mexican household incomes fell by slightly over 50% – among the rich and poor alike. Thus, what you see here is not a tripling in seven years. It is more like a six-fold gain in four years. That is far above the inflation rate and represents real progress as the economy grows.

What happened to Mexico was a profound change of direction. Most obviously, there was NAFTA, an opening to world trade. But during the ’90s, Mexico also moved away from its deeply socialistic stance and privatized hundreds of state-owned monopolies. This brought landslide foreign investment to Mexico. Last year, foreign direct investment in Mexico reached a record $24 billion – the highest in Latin America.

Half of this came from the Citibank purchase of Banamex, but the pace remains brisk. Direct investment is continuing, especially now that Argentina, Peru and Chile have disappointed investors.

Apart from low household income, there’s really no reason why Mexico should be on The Economist’s list of emerging countries while Austria, Denmark, Belgium, Spain and Italy make the top-dog list of "safe" developed countries.

Does Mexico lack roads? They could be better. But Mexico has as many miles of road for its size as Austria does. Its GDP is larger than Switzerland’s, Belgium’s, Sweden’s or Denmark’s. In terms of purchasing power, Mexico comes in ahead of Canada, Spain, Australia, The Netherlands and Belgium. And it is urban, too. Mexico City is the second largest city in the world.

As for the economy, 75% of Mexico’s GDP is now based in the service sector. Mining and agriculture play a small role these days. In terms of world trade, Mexico’s weakness is still the placement of too much emphasis on one trading partner, the United States. Over 80% of its exports are U.S.-bound. But that is changing as well.

In the past two years, Mexico has initiated open market pacts with Europe and Asia, offering reduced tariffs and other perks, similar to the deal between the United States, Canada and Mexico under NAFTA. As a result of these changes in the economy and improving trade relations, Mexico has gone from the 14th largest trading economy in the world in 1995 to the 8th largest today.

Skeptics may remember other times when Mexico looked promising… only to backslide. Investing in emerging markets tends to be more volatile than investing here at home. Throw in a change in credit rating, opinion or currency strength and it all falls apart… as it did for Thailand in 1997 and Argentina this past year. And as it did for Mexico in 1984 and again in 1994-1995.

Well, Mexico just got a midterm test – and it rates an A.

In fact, it rates several A’s. Both Moody’s and Standard and Poor’s have boosted Mexico’s credit rating to investment grade this year. This comes at a time when both agencies are downgrading more businesses and countries than they are upgrading because of accounting questions, weak earnings, trade deficits, the global recession and currency weakness outside the dollar.

Mexico is one of the few countries in the world where I would look to invest specifically for the country benefit. I don’t say that lightly. For the last two years, I have been telling Fleet Streeters that there is no good reason to go outside the United States for the heck of it.

Any sane person can look at a list of foreign markets or currencies in Barron’s to see what really happens. Last year, the United States suffered, and all markets except two – Mexico and China – fell. South Africa gained, too, but that was solely on the strength of and advance enthusiasm for mining stocks. No other major currency gained against the dollar, either – unless you count the Mexican peso, that is.

What has happened in Mexico during these past two years is telling. Mexico lost nearly a half-million jobs last year. That’s not good, but it’s in no way dire. In the United States, by comparison, 2.5 million people filed for unemployment last year as a result of mass layoffs. That’s in addition to the jobs lost here and there in small companies.

In case you are wondering, Mexico’s population is 93 million, compared to the United States’ 250 million. Thus, Mexico lost fewer jobs per capita than we did.

Meanwhile, the peso holds up and so does the Mexican Bolsa. Once a wild card, the peso has become rather boring in its stateliness. The last big currency blowout in Mexico, which occurred during the 1994-1995 recession, is not likely to recur. Back then, the peso fell from 3.5 per dollar to about 9 per US dollar. Since then, little has changed. A bit of bobbing and weaving in a range, but no grand moves. Today’s exchange rate is 9.07 pesos per dollar. This is an outstanding performance against the world’s strongest currency over a seven-year stretch.

And the stock market? So far this year, the Mexican stock market is up 16% locally and 23% in dollar terms. Last year, as the Dow, S&P 500 and Nasdaq fell, the Mexican Bolsa gained 20%.

Even inflation is finally under control. In fact, you could argue that this small recession is very good for Mexico. It helped cool a hot economy before it got too hot. Inflation dropped from the mid-teens in the late ’90s to 9% last year and is down to about 1.5% now.

All this is much to the good. But Mexico has something that not one country on The Economist’s list of top economies can claim… youth. Mexico’s demography is ideal, just when ours is turning nightmarish.

From the United States, to Western Europe and Japan, the demographics warn that young people are a scarce resource compared to old people. And the problem is much larger than anyone has admitted so far.

In Mexico, the issue doesn’t arise. Not soon anyway – even though the birth rates are falling. Of its 93 million people, only 7.5 million are over the age of 50. Only 4 million, a mere 4.3%, are already over 65. Mexico is 20 years away from the front edge of the aging crunch.

What this means for Mexico, and for us investors, is a young, vigorous population with most of its productive years still ahead of it. People are in the right age range to shore up high economic growth. And they’re of an age to do a lot of spending as their earnings increase.

Most of us – as we accumulate cash that waits to be invested elsewhere – have a good bit of money in T-bills or money market funds. These days, we’re not getting much on that money – somewhere between 2-4% at best. The alternatives are to reach out for slightly less safe returns in order to get even 5%-7% anywhere else.

Unless you go to Mexico.

Lynn Carpenter,
for The Daily Reckoning
March 13, 2002

P.S. The Bank of Mexico issues Certificados de la Tesoreria de la Federacion, called CETES (pronounced sett-ees). These are like US T-bills in that they are issued by the central bank and are government obligations. Now that Mexico is rated investment grade, as it should be, you can switch your T-bill money to CETES without undue risk… and collect nearly 7% on the 28-day CETES or 7.2% on the 91-day CETES.

To get higher rates, you can take longer terms. The 182-day CETE pays 9.1% and the 364-day bill now pays 9.1%. Why not go out the full year on money you don’t need right away? You won’t find a CD anywhere close to this in the United States. The CETES are zero-coupon bonds, which means that you buy them at a discount to the face value and collect the whole face amount at the end of the term.

This is a good place to park cash. And at these yields, it’s a great place to grow cash as well. If you want more information on CETES, see the April issue of The Fleet Street Letter…

The Fleet Street Letter’s Lynn Carpenter will tell you: "I’m not easily convinced by anybody about anything." And maybe that’s the secret behind her success outside Wall Street. Beyond the Fleet Street Letter, Lynn’s trading service, The Contrarian Speculator, has helped investors earn profits of 175% or 300% in two weeks… 260% gains in two days… or 131% in three days… in everything from oil and steel to emerging technologies, defense stocks, Swiss annuities and commodities.

Patsies, watch out! This market is a heartbreaker.

Investors are teased and tantalized… but never get what they want. Instead, they are tormented and tortured until they finally give up.

"Bubble veterans live to trade another day," says a headline in the International Herald Tribune. The day traders are not as active, nor as reckless, as they once were. But some are still solvent and still trading.

The Mogambo Guru, who tells us he is a middlin’ blues fiddler – and whose letter you can find at our site – was ranked as the 3rd best day trader in the nation by BusinessWeek – beating out Jim Stack, Joe Granville, Steve Todd, Bob Prechter and other big-name pros.

But even being one of the top traders in the nation was not enough. Mogambo says his trading expenses gradually ate away at his profits until he finally called it quits.

Most investors still believe in the promises of Wall Street. Investing for the long run always pays off, they say. Stocks always come back, they believe. But year after year, the patsies are being worn down by losses and transaction fees.

For the last five years, the S&P has returned no more than about 5% per year. The Dow is actually lower than it was 3 years ago. What do investors have to show for all the risk and heartache?


Even after this most recent run-up in stock prices, Investors’ Business Daily’s Mutual Fund Index – which is a fair measure of what the average investor is really getting from this market – is down 1.3% so far in 2002.

But let’s see how they did yesterday. Eric?…


Eric Fry from the Empire State…

– Balmy summer breezes continue to blow through the financial markets. Blue chip stocks gained some ground yesterday, gold tacked on a couple of dollars, and the bond market bounced a few ticks. The financial climate is so agreeable… What could possibly disrupt it?

– We don’t know of course, but we do know that something always does, especially when stocks sell for 40 times earnings. We at the Daily Reckoning are sitting on the edge of our seats, anxious to see what the Fates and Furies have in store for us next.

– For the moment, a seemingly endless summer is upon us. The Dow Jones Industrial Average reversed a 100-point loss early in the day to gain 21 points to 10,632. The Nasdaq, which decided not to come out and play yesterday, fell 1.7% to 1,897.12. Gold gained $2.50 to $293.30.

– Since the recession that never occurred is already over, the US economy never got the chance to do any of the usual economic housecleaning that occurs during recessions.

– In short, the economy looks a lot like my garage – piled floor-to-ceiling with throw-aways and clutter from the past. (Without a proper spring cleaning, where do you find room to pile up the brand-new things that you will never use?)

– A cluttered garage is a minor annoyance. A cluttered economy can be a major problem. As Bill noted yesterday, the balance sheets of corporations and consumers are as debt-addled today as they have ever been.

– The economy has not finished tossing out or cleaning up its old debts in order to make way for new ones. And without fresh borrowing and investing, this economy of ours might simply collect dust.

– To be sure, a few companies here and there claim that their sales are recovering. But as you may have noticed, very few companies say that their PROFITS are recovering… Only Wall Street analysts are making that cherry forecast. Earnings, unfortunately, are in short supply, which is why the current rally on Wall Street may soon run out of steam. After all, it’s hard to make steam when there ain’t much coal.

– "All the so-called bullish data," observes Charles Biderman of Liquidity Trim Tabs, "shows nothing more than a cessation of the downward trend… [Furthermore], corporate investors are bearish and Wall Street market strategists are bullish. There is no doubt that corporate investors have a much better record of predicting the future."

– Wall Street abounds with happy thoughts these days. But eventually, the stock market will need something more to support it than a few good stories. Amidst the stacks of earnings and fairy tales authored by Wall Street, there are a handful of solid non-fiction stories – just not enough of them.

– Few investors separate fact from fiction better than Warren Buffett, and here’s what he has to say in his "Letter to Shareholders" from the just-released Berkshire Hathaway annual report: "As a group, our larger holdings [names like Coca-Cola, Gillette and Wells Fargo] have performed poorly in the last few years, some because of disappointing operating results. Charlie [Munger] and I still like the basic businesses of all the companies we own. But we do not believe Berkshire’s equity holdings as a group are undervalued.

– "Our restrained enthusiasm for these securities is matched by decidedly lukewarm feelings about the prospects for stocks in general over the next decade or so… [The market] is likely to leave many investors disappointed, particularly those relatively new to the game."

– Felix Zulauf, of Zulauf Asset Management in Zug, Switzerland, agrees. "Don’t forget that the norm for the US stock market over the past 80 years is a price/earnings ratio of about 15," says Felix. "The current reading is in the ’40s. Most structural bear markets usually hit a low where stocks trade at book value. When the stock market trades at book, you get a lot of stocks that trade below book and are good values. Book value [for the S&P] right now is $220 and the S&P index now [is] at about 1,100." [The S&P 500 is currently 1,165].

– In other words, for all of you Daily Reckoning readers who are not math majors, if the S&P 500 were to trade down to book value from its current level, the index would lose more than 80% of its value. As I’m sure Buffett and Munger would agree, that’s the kind of stock market performance that would "leave many investors disappointed."


Back in the land of wine and cheese…

*** The telecoms left investors disappointed yesterday. Nokia said sales may be down 6% to 10% from last year. Lucent said its sales were still growing by about 10% but will be lower than expected.

*** Worse, investigators from both private and public sectors are beginning to look at the numbers in the light of day. "SEC Investigating WorldCom/Qwest," says the LA TIMES. "Global Crossing to be Subject of House Committee Hearing," reports Bloomberg.

*** Telecoms raised billions on the basis of zany income projections. When the revenue didn’t come in, they found ways to fabricate it. Included among their inventions was the exchange of excess capacity with other companies.

*** "The purchase and sale of so-called IRU agreements ("indefeasible right of use" in the industry jargon)," writes Christopher Byron, "became an increasingly common practice, as overbuilding in the telecom sector combined with the slowdown in the economy to create a huge capacity glut on the networks of not just Qwest, but nearly all major carriers."

*** "In the nine months leading to September 30, 2001," he continues, "the sale of excess capacity through these IRU agreements generated $989 million in revenue for Qwest – close to 6 percent of the company’s total revenue. But a corporate finance whistle-blower at the now bankrupt Global Crossing, another huge player in the IRU game, said in early February that in at least two instances, Global Crossing purchased a Qwest IRU – in each case for $100 million – and that Global Crossing ’round-tripped’ the revenue by selling an equivalent dollar amount of its own excess capacity right back to Qwest."

*** The whole sector is in trouble. But the government helped out the airlines, and the steel industry… why not bail out telecoms too?

*** "Red Herring supports the proposals of TechNet, a Silicon Valley policy advocacy group associated with the venture capitalist John Doerr, and the Computer Systems Policy Project, an advocacy group comprised of executives from companies like Dell Computer and Intel," revealed an article at Red Herring itself.

*** "We need a national broadband policy – a broadband Marshall Plan of sorts. Specifically, we endorse the goal of making 100-Mbps broadband available to 100 million US homes and small businesses by 2010. Congress should offer technology-neutral tax breaks to encourage innovation; to spur competition it should not excessively regulate nascent technologies (like voice transmission over the Internet); and it should increase funding for development of new data-transmission technologies. Both President George W. Bush and Senator Tom Daschle have recognized the need for broadband, so a new national policy would have broad, bipartisan support. Technology purchasing drove US economic growth through the ’90s; a Marshall Plan for broadband today might be the most efficient stimulus package for the entire US economy now."

*** What did America do for so many years… without broadband? How could we have lived so well – so happily – without 100Mbps at our fingertips?

God knows.

The Daily Reckoning