"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”

-- Warren Buffett

Issue #188: Tuesday, May 6, 2008

A New Tidal Wave of Cash is Headed Straight for Warren Buffett’s Favorite Currency

Today's commentary is by Sean Hyman, Currency Analyst for The Sovereign Society.

Good day Currency Traders!

Brazil has come a long way! Back in the 1980s, Brazil drowning in debt. And the Brazilian currency - the real - was the laughing stock of the currency land. Even in the ‘90s, Brazil was still so strapped with debt that investing in the stock and bond market was still considered pure speculation.

However, roll the hands of time forward to today and Brazil looks very different.

Introducing Warren Buffett's New Darling Currency

For starters, legendary investor Warren Buffett has already announced that he's holding the Brazilian real. When the conservative Oracle of Omaha owns a currency, you know he sees an impressive, long-term future for Brazil. After all, he's not a trader and he doesn't hold things for months. In fact, Buffett probably holds his "short-term" trades for around 10 years.

So that alone is catching my attention. But it gets much better. In fact just a few days ago (April 30th), Standard and Poor's upgraded Brazil; so this country has Investment Grade status for the first time in its history.

What's the big deal about that? Mutual and hedge fund managers can't invest in anything they want to buy around the world. These fund managers have to follow certain investment rules that stop them from investing in pure speculative trades. So fund managers can only invest in investment-grade plays.

So now that Brazil is officially investment-grade, a huge tidal wave of money can flow into her. In fact, institutional money managers and pension funds are now salivating at this BRIC investment.

Booming Commodities Have Been Good to Brazil

The present commodities boom has really brought Brazil's economy back to life. Once upon a time, Brazil had to import all the oil they used. Since then the state oil company, Petrobras (which also has an investment-grade rating), has discovered some large offshore oil finds. So Brazil is self-sufficient in that respect.

However, it's not just oil that's helped them. They are the world's largest producer of iron ore, coffee and sugar. They're a major exporter of soybeans, pork, beef...you know, all those commodities Jim Rogers says to buy (and the entire world desperately needs right now).

These exports are also well diversified. That means they aren't just dependent upon the U.S. to stay afloat. So they've been in some pretty good shape throughout this U.S. slowdown.

Back to Brazil's new investment-grade status: Investors didn't waste much time after hearing the news. In fact, when the news hit CNBC, the Brazilian BOVESPA surged 6.3% and hit an all-time high of 67,868.

That puts the Brazilian market up 13.8% so far this year in dollar terms. That's very impressive considering most stock indices are down or have single digit gains.

Now let's talk about their currency. The real has gained 22.4% over the past 12 months. That's the biggest gain of all of the top 16 major currencies in the world. How's that for strength?

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Check Out How the Real Has
Risen Against the Buck

Buy the Real Now Before the Second Round of Investment Money Hits Brazil

So if you're wondering if Brazil's stock market and currency have topped out, consider this. There's a second wave of investors who never invest in a particular region or market until that investment receives a second investment-grade rating.

For example, large institutions that invest US$2.3 trillion use the Lehman Aggregate Bond Index as their benchmark for what to invest in. It requires two rating services to give an investment-grade rating before they'll even touch it.

So once Moody's or Fitch follows suit, you'll see another wave of money pour into both their stock market and their currency, the Brazilian real.

The Currency Will Be the First Beneficiary

When investment assets flow into Brazil, the local currency will soar first. That's because foreign investors have to invest in the Brazilian real to buy Brazilian bonds or stocks. So you don't have to figure out where the money will ultimately end up, you just know that it will be in the real, their currency.

Just like when foreigners invest in U.S. bonds or U.S. stocks, they have to sell their currency and exchange it for dollars. That means they're buying dollars whether they buy real estate, stocks or bonds.

Also, nine of Brazil's banks received their own investment-grades on April 30th. Apparently, Standard and Poor's had really given this country a huge vote of confidence. After all, they don't upgrade and downgrade whole countries every day.

So once a rating is given it's usually kept for some years to come. Get ready to own the Brazilian real before that second wave of investment money pours into it like a tidal wave.

Sean Hyman, Currency Analyst

EDITOR'S NOTE: The Brazilian real has risen an amazing 71% against the dollar in just the last five years. The dollar has also dropped compared to the Aussie dollar, Canadian dollar, Japanese yen, Swiss franc, euro and most other major currencies around the world. But that begs the question, has the dollar had enough punishment yet? Has the dollar finally bottomed? On May 20th, Jack Crooks is hosting a special FREE webinar to address that very question. Click here for details.

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Making 'Cents' of the Headlines

What Happened:

UBS Takes Another $11 Billion Tumble

How the Markets Reacted:

Trouble is beginning to spill over into UBS' investment division too. In fact, the world's biggest wealth manager saw clients pull out $12.2 billion in assets during the first quarter. That's the first decline in investment assets in 8 years! UBS also said it expects ``tough business conditions'' to continue.

What We Say:

This caught both analysts and the market by surprise. This is a huge warning sign to investors that this credit crunch is far from over, and the housing market still hasn't recovered.

Traders dumped the U.S. dollar, and started nibbling at the yen. In fact, the dollar fell the most in three weeks versus the yen, according to Bloomberg.

Yes, markets, traders and optimists: Be warned, the credit crunch is NOT over. Fannie Mae is just the most recent evidence of a long line of signals that more market shocks are heading our way.

When that happens, we'll see a replay of what happened today - with money rushing right back into the Japanese yen - but on a much larger scale.

Click here for our full report on what's up next for the yen.

World Currency Watch
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