International investments can be like parts
of the morning farm routine here that involve our hound dog
Ma and our smarter than dogs chickens.
Each (the dog and the chickens) deems to
ignore the other as though they do not exist, except when
the chickens decide to graze on Ma’s territory which
is divided by an invisible line near the front porch of our
summer house. No one can divine this demarcation except Ma
and of course the chickens.
Ma stands at point, stiff, tail straight
out, glaring and daring. “Just try to cross the line,” she
growls. The hens of course are casually sincere, grazing
along acting as if they are not aware of what is about to
emerge. Finally, they cross the magical border and Ma explodes.
They scatter out of the sacred territory and once again all
is well. Except the chickens never give up. For some reason,
out of 250 plus acres, the grazing seems better in the small
5,000 or so square feet that is within Ma’s domain
around the house. Rather than confront, they sneak in while
Ma is not watching. See if you can see the hen in the background
sneaking up on Ma while she is looking the other way. I had
a hard time taking this shot because I was shaking so hard
On the subject of borders and sneaking,
we have been looking at the benefits of investing in emerging
currencies so we should be aware that the Mexican peso
credit spread to the US dollar has been sneaking up for
This is due in part to general disturbances
in the market caused by election jitters prior to the July
2 election. The leading candidate is believed to be the best
for the Mexican economy and has had a comfortable lead according
to polls. The rub is that leftists have recently gained increasing
popularity in the polls. Their election promise is that Mexicans
with the lowest income should have a 20% increase in wages.
They have not explained how to pay for this and investors
believe this could lead to rising inflation that could push
the peso down.
The 10-year yield spread to the US dollar
recently reached 400 bp. This means you could earn 4% more
on a ten year Mexican government peso bond than on a ten
year US government dollar bond.
Not everything about the peso is rosy. If US
economic problems cause the US to buy less Mexican goods,
the peso could fall. If the US dollar weakens,
the peso could drop. Mexico’s stock market is
on Keppler’s low value sell list. If the Mexican
stock market drops, this could bring the peso down
There are lots of ifs and coulds but
the known is, you earn about 4% more per annum with
the Mexican peso than the greenback. So a diversification
of some dollars into the peso makes sense.
Here is a comparison of Keppler’s
analysis to compare with China and India, two currencies
we reviewed last week.
||Price to Book Value
||Price to Cash Flow
||Price to Earnings
|| Dividend Yield
||Return on Equity
Watch for the release of consumer prices
on Thursday (June 8, 2006). Other peso fundamentals are not
bad (though not the best). Mexico has a small trade deficit
(-4.9 billion) and current account deficit (-5.4 billion),
but strong foreign reserves of $75.6 billion.
Also keep an eye on Mexico’s oil sector.
Mexico’s large oil reserves give the peso some long
Here is a good article in the Chicago Tribune: “Analysts
predict that Mexico's oil reserves, second only to Canada's
in filling up U.S. gasoline tanks, could dry up within a
dozen years. Meanwhile, Pemex lacks sufficient money to repair
antiquated pipelines and search for more deep-sea deposits.
“One solution would be outside investment.
But almost all Mexicans oppose loosening their constitution
to allow private or foreign interests to break the government
monopoly and hold a stake in the nation's oil.” You
can read the entire article at The
Look for short term emotional
conditions that drive the peso’s interest rates
up. Investments made at that time are likely to stay
closely related to the US dollar but with much higher
There could even be a Borrow Low-Deposit
High play. You can borrow dollars now in the 5% range and
invest in pesos at 8.93%.
For example, a US treasury bond that matures
in 2013 yields about 5.08%. A Mexican Bono that matures the
same year yields 8.93%. You can borrow US dollars from Jyske
Bank right now at 5%.
If you invested $50,000 and borrowed $100,000
to invest in this bond, your return would be $13,395 (8.93%
of $150K) less $5,000 interest (5% on the $100,000 borrowed). The
$8,395 income represents a 17.8% return.
If the dollar falls faster than the peso,
extra profit would be made. The risk of course is that the
peso falls against the greenback in which case that extra
profit could be lost or worse. Do not risk more than
you can afford to lose!
Enhance great profit potential with a diversified
portfolio of emerging currencies through a MultiCurrency
Sandwich. Learn how at garyascott.com/catalog/bldh.html
Learn about investing in emerging
currencies, gold, silver, Ecuador, import-export, overseas
markets and more. Join Merri, Thomas Fischer from Copenhagen
and Steve Marchant from Ecuador and me at our September
15-16-17, 2006 International Business and Investing Made
EZ course in North Carolina. Review where to invest and
do business now and learn which markets and currencies
may be strong in the year ahead. Learn more about Ecuador
import and export from Steve. Our May course was overbooked
and the September session is filling up fast. Our free
accommodations are reserved on a first come first served
basis so do not delay! DETAILS