Lulu wins!
The oligarchs are on the run this week as Flávio Bolsonaro, the right-wing candidate that was polling well, wasn’t even that close in the final vote (51.8% vs 48.2%), which has the US GOP candidates in a turmoil just a week ahead of their own (un)election – in which they are NOT polling well at all.
As you can see from the Bovespa chart, the market had run up 25% ahead of the election – the 4th, non-consecutive term won by Luiz Inácio Lula da Silva and, while he is likely to simply continue Brazil’s current economic policies, the big money backing Bosonaro is having none of it and the Futures are indicating a huge drop at the open (about the same time as ours) while the currency (real) is also trading down about 10% from Friday’s close.
The joke of it is, of course, that Brazil’s total debt to GDP is 83% vs 135% for the United States while Brazil’s GDP is growing at 4.2%, vs 2.2% in the US. What’s killing Brazil is the cost of that debt, which is now over 13% and it’s chewing up the Government’s budget!
Like the US, the Government budget is largely tied to mandatory spending and the strain is showing across the economy. Household Delinquencies are at a record (like the US), millions of companies are behind on payments (like the US) and farmers are defaulting at an unprecedented pace (like the US) but, unlike the US – Lula’s leftist Government has been running things since 2023 and now through 2030 (he was previously elected in 2003-2010, driving debt down considerably).
In the US pre-market, EWZ (iShares Brazil ETF) is down 25% on thin trading – giving up the entire year’s gains. I’m going to call it a buy if it stays down there as the same government will be doing the same thing tomorrow and that was certainly worth more than $30 per share all year long!
This is simply the flight of the Oligarchs, running from the exit of an economy that will not be as welcoming them or their data centers as they had hoped (though Lula has made deals to accommodate some, not none). We can also shop for bargains in individual Brazillian stocks that get caught up in the turmoil (maybe VALE?).
Lula is likely to tighten policy to lower rates because it needs to be done and he’s a practical guy – his tightening policies in the early 2000s is what got his party voted out (he had to leave over term limits) but, like our own beloved President – he’s 80 now and does not give an F anymore…
Brazil’s current deficit is 3.3% of a rapidly growing GDP while Trump’s current deficit is 7.5% of GDP – keep that in mind when the Conservative Media tells you what an economic disaster Lula’s re-election is going to be!
Consider this a bit of a practice run for next week if the Republicans are tossed out of power! Here’s a few Brazillian stocks we will be keeping an eye on this morning – in case they are over-punished as Conservative Speculators run for the exits:
Itaú Unibanco (ITUB): Brazil’s best bank is indicated near $7.11, down -26.5% from Friday’s $9.67 and close to its 52-week low of $6.82.
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Why a bounce: The P/E drops from 13.1 to about 9.7, and FY2025 return on equity was 21.0%. A 13.75% Selic helps bank margins, and the average analyst target is $10.25, 44% above the indicated price. That consensus is only two analysts, though.
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Risk: Household defaults are at a record 5.8%, and a weak real shrinks dollar earnings. Earnings come Nov. 4th.
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Nu Holdings (NU): It’s at about $11.34, down -25.2% from $15.16 and sitting on its 52-week low of $11.20.
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Why a bounce: It had 139 million customers and more than $1 billion of quarterly net income last quarter, and FY2025 return on equity was 30.3%. The P/E falls from 20.5 to about 15.3. The average target is $17.28, 52% above the indicated price and UBS raised its target to $20.50 on Oct. 20th.
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Risk: It is moving into unsecured lending just as defaults hit a record and BofA has an Underperform at $10. Earnings are Nov. 12.
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MercadoLibre (MELI): It’s indicated at about $1,538, down -15.0% from $1,810 and near its 52-week low of $1,495.
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Why a bounce: The average target is $2,315, 51% above the indicated price and revenue grew about 50% last quarter.
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Risk: Operating margin has been falling, and net income has now declined for three straight years. Sources conflict on the earnings date, Nov. 4th after the close or earlier.
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Vale (VALE): Vale is a Brazilian iron miner.
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Why a bounce: It’s down only -4.6% to about $11.82, just above its 52-week low of $11.43. Iron ore sells in dollars and costs are in reais, so a weak real HELPS margins. The average target is $15.59, 31% above the indicated price and the P/E is high at 24.8 on depressed earnings.
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Catalyst: Earnings are Oct. 30th. Suzano (SUZ) is the same trade, down only -1.6% on a P/E of 6.5. It reports Nov. 6th.
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Petrobras (PBR): This is the high-risk one. It’s down -20.3% to about $20.86 from $26.16, and a dollar of that gap is oil, which is above $100.
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Why a bounce: The P/E falls from 6.3 to about 5.0, and Brent is above $110.
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Risk: It is still 82.5% above its 52-week low of $11.43, and the average target is $21.16, barely above the indicated price. Lula plans to send Petrobras back into fuel retail, which means political pricing risk. Earnings are Nov. 11th.
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What we’re skipping. The payment and brokerage names show drops of -34% for PagSeguro, -38.6% for StoneCo and -48.8% for XP. Those prints are probably thin-volume artifacts and are the most exposed to rates and small-business credit. They’re lottery tickets until the market opens.
Join us inside for the Live Member Chat Room and we’ll take a close look at all these exciting trade opportunities this morning!
Speaking of which, in case you missed it, over the weekend we had four new reports for our Members:
It’s going to be a lively week with the Fed announcing on Wednesday, during our Live Trading Webinar – that will be fun! Warsh speaks at 2:30 and last time he spoke for just 25 minutes – we’ll see if he has more to say this time in what is likely to be a pause but I’m hoping for a 0.25% cut, rather than waiting for the next meeting.
This morning we have the Chicago Fed and the Dallas Fed and 2-Year ($69Bn) Note Auctions, tomorrow it’s Durable Goods, Home Prices, Home Sales, Consumer Confidence (or lack thereof) the Richmond Fed and a 5-Year ($70Bn) Auction. Wednesday its Retail Sales, Business Uncertainty and the Fed, Thursday is our first look at Q3 GDP, Personal Income & Spending and a 7-Year ($44Bn) Note Auction and Friday we finish up with the Employment Cost Index, Chicago’s PMI and Farm Prices.
And, of course, lots and Lots and LOTS of earnings reports to swing the market around with MSFT and GOOGL going after the Fed on Wednesday and INTC and AMZN Thursday and that will, HOPEFULLY clear up the picture for Big Tech:
This is why we’re in CASH!!! – our first big opportunity of the quarter is upon us!
