When to Expect the Unexpected

Investing in battered economies is the only sane way to profit when markets go mad. The Red Zone’s Erin Beale gives the 1,600% proof…

My recent journey to Buenos Aires gave me everything I expected – and plenty I didn’t.

I did not expect, for example, to whirl around in a crowded bar and spy my friend being licked in the face – like a kitten being bathed by its mother – by a tall, 30-something Argentine man. The fellow claimed that’s how passionate Argentineans kiss their ladies.

My friend, unfortunately, was not elated at her need for a mop after the "passion," and we fled the bar.

I did not expect to find a mullet haircut on the head of seemingly every male around. I did not expect to find Irish bars on every corner. I did not expect to get an incessant parade of curious stares because of my blond hair and American clothes. I did not expect to feel relatively safe from thugs, thieves and kidnappers during my entire stay.

And, despite everything I’d read, I certainly didn’t expect to find the country on such a firm track to stability just three years after its complete economic collapse.

Sure, I got everything I expected – the seductive tango dancers around every corner, the charming street fairs, the European architecture and cobblestone roads, the incredibly tender free-range beef and phenomenally cheap prices. But it’s what I found in the unexpected that truly amazed me.

Stability in Argentina: Living Nightmare

Imagine waking one bright morning, hurriedly lacing up your shoes and heading out early. You walk briskly to your first stop, the bank. It’s the end of the month and you need to make a big withdrawal to pay rent, electric and telephone bills and do a little grocery shopping.

Passing some curious protests in the streets, you are slammed with a life-altering realization when you reach the bank: Your account balance has been slashed by one third, and you can’t even touch the remaining two thirds because the government has put a 90-day freeze on all bank accounts. And we’re not talking risky investments here – we’re talking supposedly cast-iron savings accounts.

You can’t pay your mortgage, you can’t take out money for lunch, you can’t buy gas, you can’t pay your child’s tuition, you can’t even get a few bucks for the bus home.

Though this scenario sounds like nothing more than a ghastly dream to us, this living nightmare actually happened to the people of Argentina just three years ago.

As many of you will recall, Argentina was a Wall Street darling in the late 1990’s. U.S. investors loved the country like a fat kid loves cake. But Argentina was borrowing vast amounts of money, and by 2001 the rubber band snapped and a catastrophic economic collapse ensued. Fortunes evaporated overnight. Riots broke out in the streets. Poverty levels soared to new highs. And the flailing Argentinean government could not even begin to pay back its IMF loans or honor its bonds. The country found itself in debt totaling more than US$102 billion.

Argentina devalued its peso, which was previously artificially pegged to the U.S. dollar. The exchange rate became free to float and the U.S. dollar first jumped to 1.80 pesos, then to 2 pesos and more. "Stagflation" – a corrosive mix of high inflation and economic stagnation – set in, and, fearing the future, desperate Argentinean citizens flocked to the exchange markets and bought dollars, even by the tens or hundreds, with whatever money they could scrounge up. Their bank accounts were frozen by the government-imposed "corralito" to prevent capital flight. The exchange rate jumped to 2.50, then to 3 pesos per dollar.

Stability in Argentina: The Cheapest Country in the Western World

But now, just three years after defaulting on the largest debt in modern history, Argentina is a screaming buy. I can attest to the notion that Buenos Aires is a world-class city in a thriving country. In fact, I believe Argentina to be the absolute cheapest country in the Western World.

Argentina has a truly Western culture, as more than 95% of its citizens can directly trace their roots back to Europe. Buenos Aires is a very European city, often dubbed the "Paris of South America," though I read an article the other day describing Paris as the "Buenos Aires of Europe."

That Western feel is particularly attractive to investors who are hesitant about the South American political wild cards. Argentina benefits from a highly literate population, and many foreign companies are even beginning to move their outsourcing centers from India to Argentina because of the country’s well-educated (and cheap) workforce, as well as the more favorable time difference.

When inflation was skyrocketing in Argentina in the early 1990’s, many transplanted Europeans trekked back to their homeland. But now, with prices in Argentina so cheap, the Europeans are going "bottom-fishing" and returning once again to live and invest.

Here’s just one example of "cheap": wine, appetizer, tender juicy steak and potatoes, and coffee for 10 pesos. That’s roughly US$3.45. A 10-minute cab ride across town? Five pesos, or about US$1.74. I took a ride of comparable length in New York City a few weeks ago that cost US$20.

After visiting several top publicly traded companies, being treated to a private tour of the Buenos Aires stock exchange, interviewing busy CEO’s and exploring the burgeoning real-estate market firsthand, I stand firm in my belief that Argentinean stocks, for the most part, are overlooked and undervalued.

Stability in Argentina: Ignore Your Gut

But the rise is already starting…so please, forget everything your gut tells you about investing in a country recently arisen from the ruins. Argentina isn’t the first and probably won’t be the last country to break out after a severe economic crisis. During Mexico’s so-called "Tequila Crisis" of 1994-1995, the currency lost half its value in just a few months. Mutual funds that invest in Latin American stocks saw their value slashed by 16% (US$600 million) in a matter of days.

Mexican media giant Grupo Televisa’s shares plummeted following the peso devaluation, falling to lows of US$11.84 in March, 1995. But by April 1996, shares were on the rebound and already back to trading at US$30.24 – adding 155% in just 13 months. By 2000, shares were trading north of US$80! That’s more than 576%!

In 1998, Russia was plagued by political instability and fiscal imbalances. The IMF lent Russia billions of dollars during the summer of 1998 in an attempt to prevent the devaluation of the ruble, whose collapse brought the world financial system close to a meltdown.

During the economic turmoil, Russian telecom Rostelecom fell from upwards of US$20 to lows below US$4. By mid 1999, ROS had recovered by 200% to trade for US$12. By 2000, ROS shares were trading above US$27 – a 575% premium over devaluation lows!

Brazil caused global shockwaves in 1999 when its financial instability prompted a devaluation of its real in January 1999. Telecom giant Brasil Telecom Participacoes SA sank to trade at US$24.63 that month. But just one year later, in January 2000, BRP was trading at US$88.35 – a full 259% higher.

I traveled to Argentina with a basic premise: that Argentina had probably survived the worst of its economic crisis; that conditions in the country and its economy were steadily improving; and that there were still strings of profitable opportunities in the country for savvy investors.

And it looks like my hypothesis is proving true month after month.

Argentina’s benchmark Merval index just hit a fresh record high of 1,665-that’s a 52-week surge of 54%. And if you look at a two-year chart of the benchmark Merval, you’ll see that the index is not going to stop here.

Here’s to the unexpected,

Erin Beale
for The Daily Reckoning

September 27, 2005

Erin is one of the team of editors of Red Zone Profits, a remarkable investment service has combined the safety of fundamental value and the power of technical analysis to return a stunning 5,090.56%! It is so safe it has closed out 100% winners this summer (16 out of 16) (from June 14, 2005 to July 19, 2005)!

No word from Bill again today – but no worries, we received an equally insightful note from friend Sean Brodrick…

"Refineries east of Houston may be down for a month after Rita, they say. I’m not panicking. Are you panicking? Nah, why would we panic when all these refineries are shut when they should be making heating oil? Know why I’m not panicking? Because I live in Florida, and I don’t need heating oil. Anyone who needs heating oil, though, on the cusp of a potentially cold, cold winter, better buy an extra pair of long johns.

"Seriously, I doubt all those refineries will be out of service for a month. That’s what they said after Katrina, and there are only four refineries still out due to Katrina as of now.

"But, really, those refineries that are out of commission (temporarily) aren’t making heating oil. And some heavily accented individual was on CNBC this morning (a heavy accent always lends gravitas to what they’re saying) and he said natural gas is going to $20 by Christmas. Is that true? I don’t know, but I’m glad I don’t live in Baltimore. Or Chicago. It gets colder than a witch’s left you-know-what in a brass bra in Chicago.

"Oh, and unleaded gas prices? To the moon, Alice! Maybe not this week. But if they don’t get those refineries back online soon, it will happen soon. Little sympathy from Canada on that one though – they’re already paying the equivalent of roughly $6 a gallon.

"Anyway, the White House has a plan. President Bush has asked us all to voluntarily conserve. This is big switch from when VP Dick Cheney said: "Conservation may be a sign of personal virtue, but it is not a sufficient basis for a sound, comprehensive energy policy." But that was donkey’s years and a flurry of hurricanes ago – 2001, in fact. Now, they’re talking conservation. Now, they’re saying Rita didn’t mess up the oil industry too much. Too bad we’re smart enough to know that’s a flat-out lie. Question is, when will the thermostats in the room-temperature airheads on CNBC switch on?

"If Rita didn’t mess up Energy Alley, why is Bush offering to release more oil from the SPR? And how about that plan to build up the SPR, has that gone by the wayside? Do we have bigger problems now? Are we frolicking grasshoppers at the onset of winter, wishing we’d stored up our seeds like the ants, instead of buying big-ass HUMMERs, which looked so good in a TV commercial at the time. But man, that HUMMER is sweet. It accents our bling-bling so well.

"So I’m not panicking. Are you? Nah."

Now for the news from our team at The Rude Awakening…


Eric Fry, reporting from Wall Street:

"In 1996, Greenspan fretted aloud about the frothy stock market. But by 2000, he was praising a productivity revolution that seemed to validate the elevated share prices of the day. Hmmmm…"


Back in Baltimore…

*** "The other night, a Canadian radio host asked me whether Canada would catch pneumonia if the United States caught a housing crash-induced consumer spending cold," reported Dan Denning.

"’Not as quickly as you might think,’ I answered.

"For now, the United States and Canada are essentially trading partners with one another. But Chinese strategy and American trade policy are straining those relations. And in case you didn’t notice, Chinese President (not popularly elected, of course) Hu Jintao was in Canada to make nice with our neighbors to the north and remind them that if the Americans were making it hard for Canada to export its resource bounty south, the Canadians ought to look East.

"China, as ever, is going about the business of meeting its resource needs. But do the Canadians see a Chinese bogeyman in all this grand strategy? Doesn’t look like it. Conservative MP Monte Solberg was quoted in The [Toronto] Globe and Mail as saying, ‘It’s pretty obvious that if the Americans seem to have gone soft on the whole concept of free trade, we just have to find other markets for our products, and China is going, of course, to be a major market for these products.’

"Solberg also pointed out that Canada needed an ‘aggressive strategy’ for opening up the Chinese market. Sounds like the Chinese have beaten them to the punch, while the Americans remain oblivious to it all.

"The Money Migration is revving up."

*** Last week The Times of India reported Bill Gates will visit Chennai, India in December. He was invited to meet with the Union Minister of Communications and Information Technology, Dayanidhi Maran to work on a solution to spread computer literacy around the country.

Sounds all well and good, but Gates is reported to have a very specific goal for India – a computer in every village.

Seems like a tough task if you ask your Daily Reckoning editors. India has 1.06 billion people – but 731 million of those are dirt poor. Many living on $1 a day. Still that isn’t stopping Microsoft from entering this massive market.

Gates already has offices in Bangalore and in Hyderabad – the equivalents of Silicon Valley here in the States. Certainly seems like he is ramping up for a reason. Gates is no fool. And our resident Indian specialist, Sala Kannan, believes she knows exactly why Gates (and a lot of other huge American corporations are spending billions to enter the Indian market right now).

We’ll tell you more, dear reader, in the coming weeks. But know this…

It has nothing to do with IT, outsourcing or any of the other "bubble" sector you have been reading about in the mainstream press. Stay tuned…

The Daily Reckoning