A Defensive Stock from Brazil

The Barb in the Fishhook

The Kind of Surge You Don’t Want

Good Chemistry in Brazil

This is a rant. I’ll admit it. And it’s all a result of hearing political candidates promising that all we have to do is elect them and all of our economic problems will go away. I don’t believe it and I’m sick of hearing it from either end of the political spectrum. So you can just skip this part if you want. I’ll have a nice stock pick at the end to try to make up for my dyspeptic rambling.

Everyone in the U.S. is worried about jobs, wants to save jobs, and wants to keep U.S. companies from shipping “our” jobs overseas. They’re right to be worried. That’s why I’m being realistic when I foresee that the protection, creation and nurturing of U.S. jobs will be one of the favorite issues of the coming presidential campaign.

But what I don’t expect to hear from politicians is the truth, which is that legislative remedies are largely symbolic, and probably futile. And that’s a shame, because it makes voters targets for demagoguery and silly, unworkable answers to a complicated, serious problem. Here are three clear-eyed perspectives on the problem.

1) Job Migration and the CEO

If you are the CEO of a publicly traded company, your ultimate responsibility is not to your customers (although your marketing will certainly say that your commitment to your customers is your top priority). Your customers are your revenue source and you have to please them to stay in business. But as CEO, you’re trying to make as much profit as you can from your customers. Period.

Similarly, your responsibility is not to your workers (although you will no doubt describe them as your “greatest asset,” and work hard to retain the best of them). Your workers are a cost, and the dirty little secret behind efforts to boost productivity is that the more production you get with the least expense, the more your company makes. It’s not a coincidence that the first thing turnaround specialists look at when faced with a new client is reducing the labor force. It’s no accident that the management jargon “rightsizing” often amounts to a euphemism for layoffs.

As CEO, ultimately, your primary responsibility is to your shareholders, the people who have (indirectly) hired you to run their company. And if you can increase shareholder value by lowering labor costs and outsourcing certain tasks, that’s exactly what you have to do.

The term “outsourcing” is a pejorative in many quarters. It’s seen by its critics as a way for companies to ruthlessly cut costs, by relying on low-wage jobs in developing countries–at the expense of higher-paid workers in more developed areas such as the United States and Europe. But that’s a misleading simplification that doesn’t take into account the way in which outsourcing reinforces the generation of value-added jobs in advanced economies, while lifting the aspirations and living conditions of the world’s poor. Outsourcing helps create in emerging markets a new middle class of consumers, who in turn obtain the wherewithal to purchase our products and services.

2) Job Migration and the Consumer

It’s a tough time to be a salaried worker in the U.S. Unemployment is high, so raises are hard to come by, as are jobs with great health care, job security, high pay and pension plans.

But one factor that has been benefiting U.S. consumers for the past six or eight years has been the tidal wave of cheap goods that were a result of inexpensive labor costs in Chinese factories. Wal-Mart may proudly display their “Made in USA” labels on a few products, but low prices on Chinese goods have been more helpful in keeping household budgets on an even keel.

3) Job Migration and the Candidate

If you’re a candidate for public office in the U.S., you’d better have a plan to create, retain and even recover jobs, because that’s likely to be the issue that will resonate with the most voters. And it’s also likely that a rousing pledge to create and keep jobs, jobs, jobs for your constituents will make a great sound bite for the evening news.

But how, exactly, can a national, state or local legislator pull jobs out of a hat?

The usual answer is they will either try to woo them away from some other U.S. state, region or city with a package of tax breaks, free real estate or direct subsidies, or they will initiate or support programs that attempt to incubate new businesses in their municipalities or states, including cutting onerous regulations and red tape that make life hard for small businesses. In the first case, the net benefit to U.S. unemployment is zero, and in the second, the lead-time is likely to be years before the payoff comes.

As always, the easy part of solving the problem is promising to make it go away. Candidates are always talking about how they’ll “fight for our jobs,” or “make companies keep jobs here.”

But do we really believe that the people who fill our elected offices now haven’t been paying attention? Or haven’t thought of something?

There’s nothing easy about keeping jobs in a high-wage country.

A recent story online pointed out that the $7.2 billion San Francisco-Oakland Bay Bridge project (repairing damage from a 1989 earthquake) would realize savings of up to $400 million as a result of contracting with a Chinese company for giant pre-fab segments of roadbed. But that $400 million is money that won’t pay U.S. taxes and won’t put wages in a packet for U.S. workers.

High U.S. unemployment is like a fishhook in the cheek of the body politic. But the barb in that hook is the money that outsourcing or “offshoring” saves for companies and consumers. And anyone who thinks they have an easy solution will have some very tricky explaining to do before they get my vote. Because, personally, I’m tired of people trying to sell me easy answers to complicated questions.

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A quick electrical tip.

Of all the things that can happen to the electricity supply to your house, having the neutral wire (which grounds the system) fail should be on your least-preferred list.

My family learned this when the neutral wire inside the power line from the utility pole to our house just decided to give up and snap apart.

What happens at this point is that the electricity starts looking for some place to ground itself.

Well, actually “looking” is way too mild a verb. It would be more accurate to say that the electricity goes screaming like a rabid weasel through every wire in your house trying to find a ground.

If you’re lucky, as we were, all you’ll wind up with in terms of real damage is a scorched living room floor and a nearly complete set of non-functional major appliances. As it sizzled down our wires, the electricity fried the power cord to our TV like a potato chip and annihilated the electronic control chips of our refrigerator, microwave, stove, Wii system, clock radio, amplifier and turntable and melted our Internet cable and cable modem.

When the fire department showed up they told my wife repeatedly that it was a good thing she was home to call 911, because this could have been really bad.

So we’re thankful that our computers were kept from harm by our heavy duty circuit protectors. And that our house didn’t burn down, of course. And that’s a good feeling to carry around when you’re shopping for a whole new set of appliances.

Is there an investing lesson in all this? Not really, although I could force the issue and note that earnings season is coming, and that a bad (always a relative term, although in this case it means just “not meeting analysts’ expectations”) earnings report can drop your stocks like Wile E. Coyote falling into a canyon.

Just as my wife knew to call 911, you should have a plan for what you’ll do should one of your growth stocks fail to come up to the mark. Sometimes this means selling part of your position ahead of earnings, especially if you have a substantial profit. Sometimes it’s just a matter of putting a tight stop under your stocks and pulling the trigger if the news is bad. Whatever you do, don’t just sit there and wish it weren’t happening. That’s the road to ruin.

Markets have shown some strength in the past week, raising hopes that we may have put in a bottom, and that the current correction may be winding down.

But remember the old saying, “If you think it’s a bottom you’re too early. If you know it’s a bottom, you’re too late.” We don’t try to call bottoms, preferring to use our market-trailing timing indicators to tell us clearly when we’re in a new uptrend. But it hasn’t happened yet.

So I have a stock today that’s not the fastest horse in the race, but makes up for it with reasonable valuation, fairly steady price appreciation and a handsome dividend.

The stock is Braskem (BAK), a Brazilian chemical manufacturer that makes, sells, imports and exports chemicals and petrochemicals. Braskem is a mid-sized company (market cap is $11.7 billion) that gets 65% of its revenue from Brazil, 13% from the U.S. and the rest from South America and Europe. Its chemicals are used in consumer and industrial applications, and revenue growth has averaged over 80% per quarter for the last five quarters. Earnings growth has been inconsistent, as Brazil’s economy has faced some challenges in the past couple of years. So the 870% jump in Q1 earnings per share, while exhilarating, isn’t typical.

BAK has a couple of flaws that keep me from recommending it for Cabot China & Emerging Markets Report. First, it’s a relatively thinly traded stock, with just 266,000 shares changing hands on the average day. That’s below my usual liquidity requirements.

But with a P/E ratio of just 12, a dividend with some real muscle (forward annual dividend rate is 3.6%) and excellent prospects for Latin American growth, Braskem looks like an attractive defensive play for a tough market environment. The stock has bounced nicely from its June correction that pulled BAK from 32 to 27. It’s now sitting just below 30, and may rest there for a while.

Sincerely,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report

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