Today I want to share what could soon be an extremely profitable short:
The BRIC Claymore/BNY Mellon BRIC ETF (NYSE:EEB).
That’s because the world is now waking up from the BRIC dream.
Six years after Goldman Sachs researchers coined the acronym for Brazil, Russia, India, and China in a report titled Dreaming with BRICs: The Path to 2050, long investors could end up sleepwalking off a cliff.
You see, the World Bank just revised its global growth forecast for 2009 from -1.7% to -2.9%, and BRIC nations are finding it hard to fight the international market downtrend now forming.
The first BRIC summit took place last week in the consummate Eurasian location of Ekaterinburg, Russia, just east of the Ural Mountains that divide the two continents. Where the four countries called for a "stable, predictable, more diversified monetary system" and greater power in the World Bank and International Monetary Fund, the Claymore/BNY Mellon BRIC ETF (NYSE:EEB) plummeted the first chance it got.
EEB gapped down on Monday, June 22 to a quick 4% loss, after 50% YTD gains through June 11.
Commodity and savings-driven optimism put BRIC cheerleaders high on the astral plain over the past few years. But strong pricing and demand for oil, gas, sugar, iron and even debt—i.e. China’s massive stockpiles of dollars and U.S. bonds—depend on healthy bank-fed credit flows.
Investors and consumers all have to keep their expectations up as well, in order to justify rising costs in raw materials, consumer goods, and government bonds alike, and sagging confidence ripples far and fast.
State-level action is where BRIC matters most now—and the political echelon is also where BRIC could crumble. For example, China has launched a $585 billion stimulus package, but one-party rule casts a long shadow.
Running Down a Dream… Going Wherever it Leads?
Is the BRIC dream a profound vision to be interpreted, like when Joseph turned the Pharaoh’s dream into history’s first stock forecast? (seven years of plenty followed by seven years of famine… the ultimate bull-bear play!)
Or is BRIC more of an interrupted fantasy, like squaring up to kick the winning goal in the World Cup—right before your morning alarm goes off?
It’s a bit of both.
Asia Times Online, columnist Chan Akya called the inaugural BRIC conclave a farce, but also a "much-needed first step in a journey that could well overhaul global economic architecture in decades to come."
The BRIC summit, and the very idea of BRIC as an independent, self-sustaining unit, both reflect the past decade or so of economic growth trends and foreshadow a possible scenario for new economic leadership.
As with "decoupling," though, BRIC oversimplifies a complicated and continuous process of global economic expansion and shifts in power.
Political and business leaders in Brazil, Russia, India, and China would be wise to concentrate on smart growth that fits their needs, rather than conforming to a slick buzzword.
But when it comes to investors like us, it’s easy to profit from the falling fortunes of BRIC ETF components.
Shorting the EEB BRIC ETF
EEB is chock-a-block full of vulnerable mega-cap stocks from the four countries in question. Here’s what I mean…
Top holding China Mobile stands to lose from migrant workers returning home and cutting cell phone service.
Earnings at Petroleo Brasileiro, Brazil’s national oil company, are of course subject to oil price flux, and future earnings will be hurt by near-term underinvestment should crude fall to far.
And even though national governments have become primary lenders across all continents and even in BRIC nations, EEB doesn’t register the stimulus-era shift in financing—financials comprise 16% of the base index.
Instead of dreaming with long positions in that BRIC ETF, look at the reality of what’s going on.
Right now, heads of state around the developing world are looking first and foremost at ways to shore up domestic demand. "Buy American" or "Buy Chinese" provisions dot the $5 trillion in stimulus spending governments have promised. For India, China’s insular buying of its own goods adds to Indian entrepreneurs’ frustration over cheap Chinese goods. That’s right, even in India, Chinese imports are a major concern.
No wonder… Manufactured goods from the Middle Kindgom come in at between 10% and 70% less than Indian-made equivalents!
Corruption and Quarrels Hold BRIC Back
Corruption is also a major stumbling block on the path to BRIC dominance or even parity. Consulting group Kroll just issued its Global Fraud Report, which focuses on stimulus spending. Using data from anti-corruption watchdog Transparency International, Kroll estimates that a full 10% of total global stimulus funds—$500 billion—will end up in the hands of profiteers and dishonest officials.
Russia’s petroleum-heavy resource economy will suffer with dropping oil prices, India’s infrastructure problems still have that country pinned, and China aims its economic efforts not only toward boosting domestic demand but also to prevent social unrest that could easily arise from prolonged joblessness.
The World Bank did recently revise its China growth forecast upwards from 7.2% from 6.5%, but the Bank’s projections are notoriously fudgy.
Brazil, the only BRIC member in the Western Hemisphere, is still struggling to fight corruption. President Luiz Inacio Lula da Silva is steadily opening the country to more foreign investment and cleaning up national finances, but U.S. weakness will create drag from the north.
And of course, just because it would be more convenient for those countries to play nice, don’t expect aggressive growth strategies to coincide. The aforementioned China-India trade battle is just one snapshot of how bitter bilateral relations can get when the going gets tough.
Through the rest of 2009, be nimble and ready to short emerging markets and related ETFs when uptrends show signs of reversal.
There’s no better time than now to wake up and beat the markets to the punch.
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